Question

McKinley,Inc.,owns100percentofJacksonCompany's45,000votingshares.OnJune30,McKin- ley's internal accounting records show a $192,000 equity method adjusted balance for its investment in Jackson. McKinley sells 15,000 of its Jackson shares on the open market for $80,000 on June 30. How should McKinley record the excess of the sale proceeds over its carrying amount for the shares?

a. Reduce goodwill by $64,000.
b. Recognize a gain on sale for $16,000.
c. Increase its additional paid-in capital by $16,000.
d. Recognize a revaluation gain on its remaining shares of $48,000.

Answer 1

McKinley, Inc. should recognize a gain on sale of $16,000 on its income statement, representing the excess of the $80,000 sale proceeds over the $64,000 carrying amount for the 15,000 shares sold.

Step-by-step explanation:

When McKinley, Inc. sells a portion of its ownership in Jackson Company, it records the transaction based on the excess of the sale proceeds over the carrying amount of the shares sold. If McKinley's internal records show a $192,000 equity method adjusted balance for its investment and 15,000 shares are sold for $80,000, then we calculate the carrying amount of the shares sold by dividing the adjusted balance by the total shares and multiplying by the number of shares sold: ($192,000 / 45,000 shares) * 15,000 shares = $64,000. Since the sale proceeds of $80,000 exceed the carrying amount of $64,000, McKinley should recognize a gain on sale of $16,000 on its income statement.