Partridge & Sparrow Scenario

question 29

Multiple Choice

Partridge & Sparrow scenario:
Partridge purchased a 60% interest in Sparrow on January 1, 20X1, for $240,000. At the time of the purchase, Sparrow had the following stockholders' equity:
Any excess is attributable to equipment with a 10-year life. On January 1, 20X6, the retained earnings of Sparrow was $175,000.
-Refer to Partridge and Sparrow. During the first 6 months of 20X6, $25,000 was earned by Company S. The entire investment was sold for $300,000 on July 1, 20X6. The gain (loss) was ____.

• A) $87,000
• B) $78,000
• C) $12,000
• D) $60,000

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Definitions:

Fractional Reserve Economy

An economic system where banks hold a portion of customers' deposits in reserve and lend out the remainder, thus creating money.

Required Reserve Ratio

The minimum fraction of deposits banks are required by law to keep as reserves, either in their vaults or on deposit at a central bank.

Term Auction Facility

A monetary policy tool used by the Federal Reserve to provide short-term loans to banks, aiming to improve liquidity and stability in financial markets.

Bank Insolvency

A situation where a bank's liabilities exceed its assets, making it unable to meet its obligations and continue its operations.