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Under the equity method, Your Corporation sells its entire ABC investment, which has a carrying amount of $70,000, for $75,000 cash. What gain or loss is recognised?
ALoss of $5,000
BGain of $5,000
CGain of $25,000
DNo gain or loss
Answer & Solution
Correct answer: B. Gain of $5,000
1. Under the equity method there is no fair value adjustment at the date of sale.
2. Carrying amount of the investment = $70,000.
3. Cash received = $75,000.
4. Gain $= \$75{,}000 - \$70{,}000 = \$5{,}000$, recorded as Gain on Sale of Investment.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.9.2 "Sell the Stock Investment", p.187_
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