Assume that you are Jolee Company’s accountant. Company owner Mary Jolee has reviewed the 2021 financial statements you prepared and questions the $6,000 loss reported on the sale of its investment in Kemper Co. common stock. Jolee acquired 50,000 shares of Kemper’s common stock on December 31, 2019, at a cost of $500,000. This stock purchase represented a 40% interest in Kemper. The 2020 income statement reported that earnings from all investments were $126,000. On January 3, 2021, Jolee Company sold the Kemper stock for $575,000. Kemper did not pay any dividends during 2020 but reported a net income of $202,500 for that year. Mary Jolee believes that because the Kemper stock purchase price was $500,000 and was sold for $575,000, the 2021 income statement should report a $75,000 gain on the sale.
Required
Draft a half-page memorandum to Mary Jolee explaining why the $6,000 loss on sale of Kemper stock is correctly reported.
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