Posted: May 13th, 2015

Accounting (Common Stock)

Accounting (Common Stock)

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 the 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 the year. Terrio believes that because the Blackhawk stock purchase price was $500,000 and was sold for $575,500, the 2011 income statement should report a $75,000 gain on the sale.

Draft a 2 page memorandum to Terrio explaining why the $6,000 loss on sale of Blackhawk stock is correctly reported.