On January 4, Year1, Larsen Company purchased 5,000 shares of Warner Company for $60,500. Warner Company has a total of 25,000 ordinary shares outstanding and it is presumed the Larsen Company will have a significant influence over Warner. During each of the next two years, Warner declared and paid cash dividends of $0.85 per share, and its 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 3,000 Warner Company's shares for $39,000 cash should be:

Question

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First, we need to calculate the book value of the 3,000 shares before the sale:

Book value per share = Cost of investment/Number of shares = $60,500/5,000 = $12.10

Book value of 3,000 shares = $12.10 x 3,000 = $36,300

Next, we need to determine the gain or loss on the sale of the 3,000 shares:

Cash received = $39,000
Book value of 3,000 shares = $36,300
Gain on sale = $39,000 - $36,300 = $2,700

Finally, we need to record the journal entry for the sale:

Debit Cash $39,000
Debit Loss on Sale of Investment $8,880 ($2.96 x 3,000 shares)
Credit Long-Term Investments $47,880 ($60,500 - $12,620)

On January 4, Year1, Larsen Company Purchased 5,000 Shares of Warner