Anderson acquires 10 percent of the outstanding voting shares of Barringer on Ja
ID: 2401147 • Letter: A
Question
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $108,740 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $251,750, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $937,000 at January 1, 2013, and records net income of $254,000 for that year. Barringer declared and paid dividends of $140,000 during 2013. The book values of Barringer’s asset and liability accounts are considered as equal to fair values except for a copyright whose value accounted for Anderson’s excess cost in each purchase. The copyright had a remaining life of 16 years at January 1, 2013.
Barringer reported $308,000 of net income during 2014 and $448,000 in 2015. Dividends of $184,000 are declared and paid in each of these years. Anderson uses the equity method
If Anderson sells its entire investment in Barringer on January 1, 2016, for $503,930 cash, what is the impact on Anderson’s income?
If Anderson sells its entire investment in Barringer on January 1, 2016, for $503,930 cash, what is the impact on Anderson’s income?
Explanation / Answer
Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. Annual Amortization - First Purchase Purchase Price of 10% Interest 108740 Less: Net Book Value 937000*10% -93700 Copyright Value 15040 Life 16 Annual Amortization-First Purchase 15040/16 940 Annual Amortization - Second Purchase Purchase Price of 20% Interest 251750 Less: Net Book Value (937000 will increase by Net Income 254000 and decrease by dividend 140000) (937000+254000-140000)*20% -210200 Copyright Value 41550 Life 15 Annual Amortization-Second Purchase 2770 Equity Income-2013 2013 Equity Income 254000*10% 25400 Less: Amortization-First (From Above) -940 Net Equity Income - 2013 24460 Equity Income-2014 2014 Equity Income 308000*30% 92400 Less: Amortization-First (From Above) -940 Less: Amortization-Second (From Above) -2770 Net Equity Income - 2014 88690 Equity Income-2015 2015 Equity Income 448000*30% 134400 Less: Amortization-First (From Above) -940 Less: Amortization-Second (From Above) -2770 Net Equity Income - 2015 130690 Calculation of Investment Book Value as on 1/1/16 Purchase Price 1 Jan 2013 108740 Add: Equity Income 2013 From Above 24460 Less: Dividend 2013 140000*10% -14000 Purchase Price 1 Jan 2014 251750 Add: Equity Income 2014 From Above 88690 Less: Dividend 2014 184000*30% -55200 Add: Equity Income 2015 From Above 130690 Less: Dividend 2015 184000*30% -55200 Investment Book Value 12/31/2015 479930 Sale Value 503930 Gain on Sale of Investment 503930-479930 24000