Assume that you are Jackson Company’s accountant. Company owner Abel Terrio has reviewed the 2009 financial statements you prepared and questions the $6,000 loss reported on the sale of its investment in Blackhawk Co. common stock. Jackson acquired 50,000 shares of Blackhawk’s common stock on December 31, 2007, at a cost of $500,000. This stock purchase represented a 40% interest in Blackhawk. The 2008 income statement reported that earnings from all investments were $126,000. On January 3, 2009, Jackson Company sold the Blackhawk
stock for $575,000. Blackhawk did not pay any dividends during 2008 but reported a net income of $202,500 for that year. Terrio believes that because the Blackhawk stock purchase price was $500,000 and was sold for $575,000, the 2009 income statement should report a $75,000 gain on the sale.
Required: Draft one half page memorandum to Terrio explaining why the $6,000 loss on sale of Blackhawk stock is correctly reported.