Jabiru corporation purchased a 20% interest in fish company common stock on january 1, 2013 for $300,000. this investment was accounted for using the complete equity method and the correct balance in the investment in fish account on december 31, 2015 was $440,000. the original excess purchase transaction included $60,000 for a patent amortized at a rate of $6,000 per year. in 2016, fish corporation had net income of $4,000 per month earned uniformly throughout the year and paid $20,000 of dividends in may. if jabiru sold one-half of its investment in fish on august 1, 2016 for $500,000, how much gain was recognized on this transaction?

$280,950

Explanation:

As for the information given:

Closing balance of investment on 31 December 2015 = $440,000

Now the following adjustments need to be made to calculate the balance as on 1 August 2016

Add: Share of income from Jan to Jul 2016 = $4,000 7 months 20% = $5,600

Less: Dividend Received = $20,000 20% = $4,000

Less: Amortization of patent = $6,000/12 7 = $3,500

= $440,000 - $1,900 = $438,100

Since Jabiru sold half of its investment, thus, value of its half of the investment shall be:

$438,100/2 = $219,050

Sale value = $500,000

Thus, gain amount = $500,000 - $219,050 = $280,950

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