Gray Financial Services Inc.invested $15,000 to acquire 3,750 shares of Mitt Investments Inc.on March 15,2012.This investment represents less than 20% of the investee's voting stock.On May 7,2016,Greg Financial Services Inc.sells 1,750 shares for $12,250.When the transaction is recorded in a journal entry,________.

Question

Quizplus · Accepted Answer

When a portion of the investment in a company is sold, the gain or loss on disposal is recorded. The gain in this case is the selling price of $12,250 minus the carrying value of the 1,750 shares ($7,500, which is 2,000 shares x $15 per share), which is $4,750. Therefore, Gain on Disposal will be credited for $4,750. Cash will also be debited for the selling price of $12,250. There is no need to record any adjustment to the long-term investments account since the shares sold represent less than 20% of the investee's voting stock.