Maryland Financial Services invested $15,000 to acquire 3,750 shares of Delaware
ID: 2446581 • Letter: M
Question
Maryland Financial Services invested $15,000 to acquire 3,750 shares of Delaware Investments on March 15, 2012. This investment represents less than 20% of the investee's voting stock. On May 7, 2016, Maryland Financial Services sells 1,750 shares for $12,250. When the transaction is recorded in a journal entry: A) Credit Gain on Disposal . B) Credit Long-term Investments—Available-for-Sale C) Credit Cash D) Debit Long-term Investments—Held-to-Maturity . For unserstanding can you please provide how you computed the answer
Explanation / Answer
Answer: As the value of investment is less than 20% of the investees total common stock, it can not be accounted under equity method. It should be accounted as any of the category : trading security, Available for sale or held till maturity.
The Cost per share = $15,000/3,750 = $4 per share
The gain is = Sales value of investement- Cost of investment sold = $12,250 - 1,750*$4 = $5,250
So the journal entry is:
By Cash Dr $12,250
To Gain on Disposal Cr $5,250
To Long-term Investments Cr $7,000