On January 4,Year 1,Larsen Corp purchased 10,000 shares of Warner Corp for $119,000 plus a broker's fee of $2,000.Warner Corp has 50,000 common shares outstanding and it is presumed the Larsen Corp will have a significant influence over Warner Corp.During Year 1 and Year 2,Warner Corp declared and paid cash dividends of $0.85 per share.Warner Corp's net income was $72,000 and $67,000 for Year 1 and year 2,respectively.The January 12,Year 3 entry to record the sale of 5,000 shares of Warner Corp for $65,000 should be:

Question

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Larsen Corp purchased 10,000 shares of Warner Corp for $119,000 plus a broker's fee of $2,000. 
Cost per share = (119,000 + 2,000)/10,000 = $12.10

As Larsen Corp has significant influence over Warner Corp, the equity method should be applied to account for the investment.

Year 1:
Dividend received = 10,000 shares x $0.85 per share = $8,500
Investment in Warner Corp = 10,000 shares x $12.10 per share = $121,000
Larsen Corp's share of Warner Corp's net income = 10,000 shares/50,000 shares x $72,000 = $14,400
Investment in Warner Corp (Year end) = $121,000 + $14,400 - $8,500 = $126,900

Year 2: 
Dividend received = 10,000 shares x $0.85 per share = $8,500 
Investment in Warner Corp (Year end) = $126,900 + (10,000 shares/50,000 shares x $67,000) - $8,500 = $135,400

On January 12, Year 3, Larsen Corp sold 5,000 shares of Warner Corp for $65,000.

The journal entry to record the sale would be:
Cash $65,000
Investment in Warner Corp $60,500 ($12.10 x 5,000 shares)
Gain on sale of investment $4,500 ($65,000 - $60,500)

Therefore, choice B is the best option.

On January 4,Year 1,Larsen Corp Purchased 10,000 Shares of Warner