Question

8. Point Co. purchased 90% of Sharpe Corp.'s voting stock on January 1, 20X2 for $5,580,000. Prior to the acquisition, Point held a 10% equity position in Sharpe Company. On January 1, 20X2 Pointe's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point records the following: a. Debit Gain on revaluation of Sharpe's stock $280,000 b. Credit Gain on revaluation of Sharpe's stock $280,000 c. Credit Investment in Sharpe stock $5,860,000 d. Debit Investment in Sharpe stock $6,200,000

Answer 1

Answer:

Option (b) is correct.

Explanation:

Given that,

Cost of stock purchased = $5,580,000

Book value of 10% investment in Sharpe = $340,000

Fair value of 10% investment in Sharpe = $620,000

Therefore, the fair value of 10% investment in Sharpe company is greater than the book value. So, there is a gain of:

= Fair value of 10% investment - Book value of 10% investment

= $620,000 - $340,000

= $280,000

Hence, the gain on the revaluation of the Sharpe stock is credited.