apter one Saved Help Save & ExitSub On July 1, 2016, Killearn Company acquired 8

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apter one Saved Help Save & ExitSub On July 1, 2016, Killearn Company acquired 88,000 of the outstanding shares of Shaun Company for $13 per share. This acquisition gave Killearn a 25 percent ownership of Shaun and allowed Killearn to significantly influence the investee's decisions. As of July 1, 2016, the investee had assets with a book value of $3 million and liabilities of $74,400. At the time, Shaun held equipment appraised at $364,000 above book value; it was considered to have a seven-year remaining life with no salvage value. Shaun also held a copyright with a five-year remaining life on its books that was undervalued by $972,000. Any remaining excess cost was method for its investment in Shaun. Shaun's policy is to declare and pay a $1 per share cash dividend every April 1 and October 1. Shaun's income, earned evenly epreciation and amortization are computed using the straight-line method. Killearn applies the equity throughout each year, was $598,000 in 2016, $639,600 in 2017, and $692,400 in 2018. In addition, Killearn sold inventory costing $91,200 to Shaun for $152,000 during 2017. Shaun resold $92,000 of this inventory during 2017 and the remaining $60,000 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 all requirements, enter your answers in whole dollars and not in millions.) Equity income 2017 Prev 4 of 4 EE Next

Explanation / Answer

a. Determine the equity income to be recognized by Killearn during each of these years Acquisition Price (88000*13) $1,144,000 Less :Book Value (2925600*25%) $731,400 Payment over Book Value $412,600 Remaining Life Annual Amortization Equipment (364000*25%) $91,000 7 yrs $13,000 Copyright (972000*25%) $243,000 5Yrs $48,600 Goodwill $78,600 Indefinite $0 Annual Amortization $61,600 Sale $152,000 Less : Cost of Goods Sold $91,200 Gross Profit $60,800 Gross Profit Margin 40% Inventory as on 31.12.2017 $60,000 Profit on Intra entity sale still held (60000*40%) $24,000 Intra Entity gross profit Deferred from 2017 to 2018(24000*25%) $6,000 2016 Basic Equity Accrual(598000*1/2*25%) $74,750 Less: Ammortization(1/2*61,000) $30,800 Equity Income 2016 $43,950 2017 Basic Equity Accrual(639600*25%) $159,900 Less: Ammortization $61,600 Less: Deferal Intra Entity Profit $6,000 Equity Income 2017 $92,300 2018 Basic Equity Accrual(692400*25%) $173,100 Less: Ammortization $61,600 Recognition of deferred profit $6,000 Equity Income 2018 $117,500 b. Compute Killearn’s investment in Shaun Company’s balance as of December 31, 2018 Acquisition Price $1,144,000 Equity Income 2016 $43,950 Less : 2016 Dividends Declared (88000*1) $88,000 Equity Income 2017 $92,300 Less : 2017 Dividends Declared (88000*1*2) $176,000 Equity Income 2018 $117,500 Less : 2018 Dividend Declared ( 88000*1*2) $176,000 Investment in Shaun $957,750

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