View History Bookmarks People Window Help xY As of July 1,2016, the invest+ ege
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View History Bookmarks People Window Help xY As of July 1,2016, the invest+ ege Docs Test 1-Part 2 Gosearches.com Help Save&Exit Sube 2 6 On July 1, 20v6, Killearn Compeny acquired 138,000 of the outstanding shares of Shaun Company for $20 per share. This acquisition Killearn a 40 percent ownership of Shaun and allowed Killearn to significantly influence the investee's decisions 1,2016, the investee had assets with a book value of $6 million and liabilities of $167,750. At the time, Shaun held equipment appraised at $288,750 above book value it was considered to have a heid a copyright with a five-year remaining life on its books that was remaining life with no salvage value. Shaun also by $607,500. Any remaining excess cost was tributable to goodwill Depreciation and amortzation are computed using the straight-line method. Kilearn applies method for its investment in Shaun April 1 and October 1 Shaun's income, earned evenly Shaun's policy is to declare and pay a $1 per share cash dividend every vroughot each year, was $641000 in 2016, S670000 in 20 7, and ST7200 in 2018 In addition, Killearn soid inventory costing $86,400 to Shaun for $144,000 during 2017 Shaun resold $10,000 of this inventory during 2017 and the remaining $34,000 during 2018 a. Determine the equity income to be recognized by Killearn during each of these years b. Compute Killearn's Investment in Shaun Company's balance as of December 31, 2018. (For al requirements, enter your answers in whole dellars and not in millions) Prey1 of4 ili Next > MacBook 5 pfion command command optionExplanation / Answer
Solution:
a) Calculation of the Equity Income to be Recognized by Killearn during the Each of these Years:
Equity Income 2016
Basic equity accrual ($641,000 × 0.5 year × 40%)........................... $128,200
Amortization (0.5 year - see Schedule 1).......................................... (32,550)
Equity Income—2016.................................................................... $95,650
Equity Income 2017
Basic equity accrual ($670,000 × 40%).......................................... $268,000
Amortization (see Schedule 1)......................................................... (65,100)
Deferral of unrealized profit (see Schedule 2)............................. (5,440)
Equity Income—2017................................................................... $197,460
Equity Income 2018
Basic equity accrual ($717,200 × 40%).......................................... $286,880
Amortization (see Schedule 1)......................................................... (65,100)
Recognition of deferred profit (see Schedule 2)......................... 5,440
Equity Income—2018................................................................... $216,340
Schedule 1—Acquisition Price Allocation and Amortization
Acquisition price (138,000 shares × $20) $2,760,000
Book value acquired ($5,832,250 × 40%) 2,332,900
Payment in excess of book value $427,100
Excess payment identified with specific assets: Life Amortization
Equipment ($288,750 × 40%) $115,500 7 yrs. $16,500
Copyright ($607,500 × 40%) 243,000 5 yrs. 48,600
Goodwill 68,600 indefinite -0-
Total annual amortization (full year) $65,100
Schedule 2 - Deferral of Unrealized Intra-entity Gross Profit
Intra-entity Gross Profit Percentage:
Sales $144,000
Cost of goods sold 86,400
Gross profit $57,600
Gross profit percentage: $57,600 ÷ $144,000 = 40%
Inventory remaining at December 31, 2017.............................................. $34,000
Gross profit percentage ........................................................................ × 40%
Total profit on intra-entity sale still held by affiliate........................ $13,600
Investor ownership percentage.......................................................... ×40%
Unrealized intra-entity gross profit deferred from 2017 until 2018................................................................................... $5,440
b) Calculation of the Killearn's Investment in Shaun Company's Balance as of December 31, 2018:
Investment in Shaun—December 31, 2018 balance
Acquisition price...................................................................................... $2,760,000
2016 Equity income (above)................................................................. 95,650
2016 Dividends declared during half year (138,000 shares × $1.00) (138,000)
2017 Equity income (above)................................................................. 197,460
2017 Dividends declared (138,000 shares × $1.00 × 2).................... (276,000)
2018 Equity income (above)................................................................. 216,340
2015 Dividends declared (138,000 shares × $1.00 × 2).................... (276,000)
Investment in Shaun—12/31/18................................................. $2,579,450
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