At December 31, 2012 year-end, Smith Corporation's investment in Wesson Inc. was $200,000 consisting of 80% of Wesson's $250,000 stockholders' equity on that date. On April 1, 2017, Smith sold 20% interest (one-fourth of its holdings) in Wesson for $65,000. During 2017, Wesson had net income of $75,000(earned uniformly) and on July 1, 2017, Wesson paid dividends of $40,000. Smith uses the equity method to account for the investment.

Required:

1. What is the gain or loss on sale of the 20% interest?

2. Record the journal entry for the sale of the 20% interest. Use the actual sales date assumption.

Answer:

Requirement 1

Selling price

Book value of interest sold:

Beginning balance

Income for 3 months

Adjusted book value

Percentage of interest sold

Book value applied

Gain on sale

Requirement 2 Debit Credit

Cash

Investment in Wesson

Gain from sale of investment in Wesson