Question 1
Donavan Corp. purchased shares in Bailey Corp as follows:
Net assets on
Date # shares Cost Date Acquired
Oct 1, 2015 3,000 $ 650,000 $ 1,500,000 (1)
Jan. 1, 2017 1,000 300,000 1,700,000 (2)
(1) As of Oct. 1, 2015, Bailey Corp owned a piece of equipment with a book value of $500,000
and a fair value of $600,000. At that time, the equipment had a remaining useful life of five
years. At that time, Bailey Corp also owned a piece of land whose book value exceeded its fair
value by $20,000.
(2) As of Jan. 1, 2017, Bailey Corp owned a piece of equipment with a book value of $300,000
and a fair value of $250,000. At that time, the equipment had a remaining useful life of ten
years.
Bailey Corp.’s results were as follows:
Year Income (loss) Dividends
2015 400,000 50,000
2016 200,000 50,000
2017 (100,000) 50,000
2018 500,000 50,000
Both corporations have a December 31 fiscal year end. In all years, income was earned evenly
over the year and dividends were paid out on the last day of the fiscal year.
On July 1, 2018 Donavon Corporation sold 1,500 shares in Bailey Corporation for $400,000. No
goodwill write-downs were necessary.
Throughout the years 2015 to 2018, Bailey Corp had 10,000 shares outstanding.
Required
Calculate the gain or loss on disposal of the 1,500 shares on July 1, 2018. Calculate the balance
of the investment in Bailey account of Donavan Corp as at the end of 2018 using the equity
method.