Question

Assume that you are Jackson Company’s accountant. Company owner Abel Terrio has reviewed the 2011 financial statements you prepared and questions the $6,000 loss reported on the sale of its investment in Blackhawk Co. common stock. Jackson acquired 50,000 shares of Blackhawk’s common stock on December 31, 2009, at a cost of $500,000. This stock purchase represented a 40% interest in Blackhawk. The 2010 income statement reported that earnings from all investments were $126,000.
On January 3, 2011, Jackson Company sold the Blackhawk stock for $575,000. Blackhawk did not pay any dividends during 2010 but reported a net income of $202,500 for that year. Terrio believes that because the Blackhawk stock purchase price was $500,000 and was sold for $575,000, the 2011 income statement should report a $75,000 gain on the sale.
Required
Draft a one-half page memorandum to Terrio explaining why the $6,000 loss on sale of Blackhawk stock is correctly reported.


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  • CreatedMarch 18, 2015
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