I need help with the following problem. Please assist. Thanks. At the end of the question and answer portion of the annual stockholder's meeting of Kemper Corporation, stockholder Mike Kerwin asks, "Why did management sell the holding in UMW Company at a loss when this company has been very profitable during the period its stock was held by Kemper. Since President Tony Chavez has just concluded his speech on the recent success and bright future of Kemper, he is taken aback by this question and responds, "I remember we paid $1,300,000 for that stock some years ago, and I am sure we sold that stock at a much higher price. You must be mistaken."Kerwin retorts, Well, right here is footnote number 7 to the annual report it shows that 240000 shares, a 30% interest in UMW, were sold on the last day of the year. Also, it states that UMW earned $520,000 this year and paid out $160000 in cash dividends. Further, a summary statement indicates that in past years, while Kemper held UMW stock, UMW earned $1240000 and paid out $440000 in dividends. Finally, the income statement for this year shows a loss on the sale of UMW stock $180000. So, I doubt that I am mistaken.” Red-faced, president Chavez turns to you. a) What dollar amount did Kemper receive upon the sale of the UMW stock? b) Explain why both stockholder Kerwin and president Chavez are correct.
Both are right it is just the method used by them to account for investment, you can see in the following calculation that equity method is showing loss of $180000 while cost method is showing a profit of $168000 on investment.
Investment using equity method
Purchase price 1300000
Add profit 156000
Less dividend -48000
Add previous profit 372000
Less dividend -132000
Investment value
When sold 1648000
Less loss on sale -180000
Sold for 1468000
Investment at cost method
Purchase value 1300000
Less sold for -1468000
Profit on sale 168000