Table 16-3
On January 2, 2017, Harper Corporation purchased 40% of the outstanding shares of Martin Corporation for $800,000. Net income reported by Martin Corporation for 2017 and 2018 was, respectively, $100,000 and $125,000. Dividends paid by Martin Corporation during 2017 and 2018 were, respectively, $60,000 and $75,000. Harper Corporation has representation on the Martin corporation board of directors.
-Referring to Table 16-3,assume on December 31,2018,Harper Corporation sells 50% of its investment in Martin Corporation for $525,000.Harper Corporation will report a:

Question

Quizplus · Accepted Answer

Harper Corporation initially invested $800,000 to acquire 40% of Martin Corporation. This implies that the fair value of Martin Corporation is $2,000,000 (=$800,000 ÷ 40%).

At the end of 2018, Harper Corporation sold 50% of its investment for $525,000. This implies that the fair value of Harper Corporation's total investment in Martin Corporation at the end of 2018 was $1,050,000 (=$525,000 ÷ 50%).

The carrying value of Harper Corporation's investment at the end of 2018 (after recognizing its share of Martin Corporation's net income and dividends) is $740,000 (=$800,000 + $100,000 - $60,000 + $125,000 - $75,000).

Therefore, Harper Corporation will recognize a gain on the sale of its investment of $310,000 (=$1,050,000 - $740,000). However, this gain should be allocated between the proportion sold and the proportion retained. Since Harper Corporation only sold 50% of its investment, it should recognize a gain of $155,000 (=$310,000 × 50%).

Finally, the amount Harper Corporation received on the sale of its investment ($525,000) exceeds the carrying value of the investment at the date of sale ($400,000 = 50% of $800,000). Therefore, Harper Corporation will recognize an additional gain on the sale of investment of $80,000 (=$525,000 - $400,000).

Overall, Harper Corporation will report a gain on the sale of investment of $235,000 (=$155,000 + $80,000).

Table 16-3 on January 2, 2017, Harper Corporation Purchased 40% of the of the Outstanding