Anderson acquires 10 percent of the outstanding voting shares of Barringer on Ja
ID: 2483553 • Letter: A
Question
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $101,100 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $246,850, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $887,000 at January 1, 2013, and records net income of $255,000 for that year. Barringer declared and paid dividends of $90,000 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 $303,500 of net income during 2014 and $393,500 in 2015. Dividends of $129,000 are declared and paid in each of these years. Anderson uses the equity method. On its 2015 comparative income statements, how much income would Anderson report for 2013 and 2014? If Anderson sells its entire investment in Barringer on January 1, 2016, for $516,565 cash, what is the impact on Anderson’s income? Assume that Anderson sells inventory to Barringer during 2014 and 2015 as follows: Year Cost to Anderson Price to Barringer Year-End Balance (at Transfer Price) 2014 $44,100 $63,000 $25,200 (sold in following year) 2015 40,150 73,000 50,400 (sold in following year) c. What amount of equity income should Anderson recognize for the year 2015?
Explanation / Answer
a .
Allocation anf annual amortization on first purchase
Purchase price of 10%investment=101100
Net book value(887000×10%)=88700
Difference=12400
Annual amortization(12400÷16)=775
Allocation anf annual amortization on second purchase
Purchase price of 20%investment=246850
Net book value(887000 is increase by255000but decrease by 90000)(1052000××20%)=210400
Difference=36450
Annual amortization(37450÷15)=2430
Equity income 2013(after conversion to establish comparability)
2013 basic equity income accrual(255000×10%) =25500
2013 amortization on first purchase(above)=(775)
Equity income2013=24725
Equity income2014
2014 basic equity income accrual(303500×30%) =91050
2014 amortization on first purchase(above)=(775)
2014 amortization on second purchase=(2430)
Equity income2014=87845
b.
Investment in Barringer;
Purchase price on jan1,2013=101100
2013 equity income(above)=24725
Dividend(90000×10%)=(9000)
Purchase price on jan1,2014=248650
2014 equity income(above)=87845
Dividend(129000×30%)=(38700)
2015 basic equity income accrual(393500×30%) =118050
2015 amortization on first purchase(above)=(775)
2015 amortization on second purchase=(2430)
2015 dividend(129000×30%)=(38700)
Total investment in Barringer(12/31/2015)=488965
Gain on sale of investment in Barringer;
Sales price=516565
Book value(above)=(488965)
Gain on sale of investment=27600
c.
Defferal of 2014 gross profit inti 2015
Ending inventory=25200
Gross profit %(18900/63000)=30%
Unrealized gross profit=7560
Anderson ownership unrealized intraentity gross profit(30%)=2268
Defferal of 2015 gross profit inti 2016
Ending inventory=50400
Gross profit %(32850/73000)=45%
Unrealized gross profit=22680
Anderson ownership unrealized intraentity gross profit(30%)=6804
Equity income2015:
2015 basic equity income accrual(393500×30%) =118050
2015 amortization on first purchase(above)=(775)
2015 amortization on second purchase=(2430)
Realization of 2014 intraentity profit(above)=2268
Deferral of 2015 intraentity profit(above)=(6804)
Equity income2015=110309