Anderson acquires 10 percent of the outstanding voting shares of Barringer on Ja
ID: 2491333 • Letter: A
Question
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $113,560 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $264,000, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $982,000 at January 1, 2013, and records net income of $221,000 for that year. Barringer declared and paid dividends of $102,000 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 $255,000 of net income during 2014 and $357,000 in 2015. Dividends of $126,000 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 $515,740 cash, what is the impact on Anderson’s income?
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $113,560 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $264,000, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $982,000 at January 1, 2013, and records net income of $221,000 for that year. Barringer declared and paid dividends of $102,000 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 $255,000 of net income during 2014 and $357,000 in 2015. Dividends of $126,000 are declared and paid in each of these years. Anderson uses the equity method
a.On its 2015 comparative income statements, how much income would Anderson report for 2013 and 2014?
Explanation / Answer
Part A)
To determine the value of income for each year, we will have to calculate the annual amortization as follows:
______
Now, we can calculate the income for the Year 2013 and 2014 as follows:
____________
Part B)
To calculate the gain, we first need to determine the value of Barringer's Investment as on 31/12/2015 as follows:
______
Now, we can calculate the gain on sale of investment as follows:
____________
Part C)
To calculate the amount of equity income for 2015, we need to calcuate the value of unrealized intra-entity gross profit for 2014 and 2015 as follows:
______
Now, we can calculate the value of equity income for 2015 as follows:
Allocation and Annual Amortization - First Purchase Purchase Price of 10% Interest 113,560 Less Net Book Value (982,000*10%) 98,200 Copyright 15,360 Life of Copyright 16 Annual Amortization $960 Allocation and Annual Amortization - Second Purchase Purchase Price of 20% Interest 264,000 Less Net Book Value [(982,000 + 221,000 – 102,000)*20%] 220,200 Copyright 43,800 Life of Copyright 15 Annual Amortization $2,920