Memorandum to Abel Terrio
To: Abel Terrio
Fomm: Yailin Veloso, Jackson company Accountant
Date: June 20, 2013
Subject: Income Statement Inquiry
Mr. Terrio I understand your concern and relate to your worries, but I can assure you that the statement I provided to you was correct. I can also see where you thought it should have been a gain of $75,000 instead of a loss of $6,000. But in the next paragraph I will provide you a more detailed explanation so that you can understand better mathematical understanding of how this Black Hawk common stock was not the benefactor on this particular sale.
Jackson acquired 50,000 shares of Blackhawk's common stock on December 31, 2009, at a cost of $500,000 with a 40% value. Jackson Company total net income was $126,000 with a 40% interest in Black Hawk you gain $50,400 giving a total amount of $202,500 for your 2011 income report. However $202,500 times the 40% interest in Black Hawk gives you the $81,000 we share. The investment increased to $581,000 by the time of sale in 2011. You sold your Black Hawk stock in $575,000 giving you a loss of $6,000. In order to gain money with this transaction or at least not loose any money you should have sold the stock in $581,000 or more.
The equity method is use when an investor has a significant influence over an investee. This usually exists when an investor owns 20% or more of the investee’s voting stock but not more than 50%. The equity method means an investor records its share of investee earnings with a debit to the investment account and a credit to a revenue account. Dividends received reduce the investment account balance (Wild, Shaw, Shappetta 2011). If the Jackson Investment in the Black Hawk stock would have been less than 20% the cost method would have been suitable for the investment, the cost method increases the value of accounting information and also improves business organization (Ocneanu, L., & Bucsa, R. C. (2012)). But since our investment was of 40% the equity method was
Fomm: Yailin Veloso, Jackson company Accountant
Date: June 20, 2013
Subject: Income Statement Inquiry
Mr. Terrio I understand your concern and relate to your worries, but I can assure you that the statement I provided to you was correct. I can also see where you thought it should have been a gain of $75,000 instead of a loss of $6,000. But in the next paragraph I will provide you a more detailed explanation so that you can understand better mathematical understanding of how this Black Hawk common stock was not the benefactor on this particular sale.
Jackson acquired 50,000 shares of Blackhawk's common stock on December 31, 2009, at a cost of $500,000 with a 40% value. Jackson Company total net income was $126,000 with a 40% interest in Black Hawk you gain $50,400 giving a total amount of $202,500 for your 2011 income report. However $202,500 times the 40% interest in Black Hawk gives you the $81,000 we share. The investment increased to $581,000 by the time of sale in 2011. You sold your Black Hawk stock in $575,000 giving you a loss of $6,000. In order to gain money with this transaction or at least not loose any money you should have sold the stock in $581,000 or more.
The equity method is use when an investor has a significant influence over an investee. This usually exists when an investor owns 20% or more of the investee’s voting stock but not more than 50%. The equity method means an investor records its share of investee earnings with a debit to the investment account and a credit to a revenue account. Dividends received reduce the investment account balance (Wild, Shaw, Shappetta 2011). If the Jackson Investment in the Black Hawk stock would have been less than 20% the cost method would have been suitable for the investment, the cost method increases the value of accounting information and also improves business organization (Ocneanu, L., & Bucsa, R. C. (2012)). But since our investment was of 40% the equity method was