Question

Westbrook Financial Services, Inc. invested $15,000 to acquire 7,250 shares of Cloud Investments, Inc. on March 15, 2015 This investment represents less than 20% of the investee's voting stock. On May 7, 2018, Westbrook Financial Services, Inc. sells 2,250 shares for $12,250. Which of the following will be the correct journal entry for the May 7, 2018 transaction? (Round any intermediate calculations to two decimal places, and your final answer to the nearest dollar.) 12,250
A. Cash 12,250
Gain on Disposal 12,250
B. Cash 12,250
Equity Investments 12.250
C. Loss on Disposal 12,250
Equity Investment 12,250
D. Cash 12,250
Equity Investments 4,657
Gain on Disposal 7,593

Answer 1

Answer:

D. Cash 12,250

Equity Investments 4,657

Gain on Disposal 7,593

Explanation:

Since Westbrook's investment doesn't represent a significant influence on Cloud, the equity method for recording investments is not required. So the investment and related transactions must be reported at fair market value.

In this case, since cash is received, cash account must be debited by $12,250. The initial cost of the stocks that were sold = ($15,000 / 7,250) = $2.07 x 2,250 stocks = $4,657, so that amount must be credited to equity investment account (it decreases).

Finally, the gain resulting from this transaction = sales price - cost = $12,250 - $4,657 = $7,593.