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 stocks. 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 believe 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 sale.


I need to write a memo to Terrio explaining why the $6,000 loss on sale of Blackhawk stock is correctly reported.

The accounting standard you need is IAS 28: investments in associates.

The numbers you need are the original cost and added to that, the % increase in the associate in the year. Take the total of that away from the proceeds of the disposal, and you've got your loss on disposal of $6,000.

All you have to do then is put it into a memo referencing the provision of IAS 28 that requires this treatment, and to help explain it, show a brief calculation of it along the lines of:

Oringal cost... $500,000
% share for year... $xxx,xxx
Total... $xxx,xxx
Proceeds of sale... $(575,000)
Loss on disposal... $6,000

(be sure to replace the $xxx,xxx with actual numbers involved. I've left that bit for you to figure out).