Question

Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1, 2017, for $316,000, which gives Belden the ability to significantly influence Sheffield. Sheffield has a net book value of $828,000 at January 1, 2017. Sheffield's asset and liability accounts showed carrying amounts considered equal to fair values except for a copyright whose value accounted for Belden's excess cost over book value in its 30 percent purchase. The copyright had a remaining life of 16 years at January 1, 2017. No goodwill resulted from Belden's share purchase.

Sheffield reported net income of $162,000 in 2017 and $224,000 of net income during 2018. Dividends of $86,000 and $94,000 are declared and paid in 2017 and 2018, respectively. Belden uses the equity method.

1. On its 2018 comparative income statements, how much income would Belden report for 2017 and 2018 in connection with the company's investment in Sheffield?

2. If Belden sells its entire investment in Sheffield on January 1, 2019, for $422,000 cash, what is the impact on Belden's income?

3. Assume that Belden sells inventory to Sheffield during 2017 and 2018 as follows. What amount of equity income should Belden recognize for the year 2018?

   Year	Cost to Belden	Price to Sheffield	Year-End Balance (at Transfer Price)
   2017	$31,860	$54,000	$18,000 (sold in following year)
   2018	31,860	59,000	40,000 (sold in following year)

A. Equity income 2017 _________

Equity income 2018 ____________

B. Gain or Loss on sale of investment ___________

C. Equity income

Answer 1

a) Determining the Income that Would Belden Report for 2017 and 2018 in Connection with the Company's Investment in Sheffield:
Allocation and Annual Amortization:
Purchase price of 30 percent interest	$316,000
Net book value ($828,000 * 30%)	($248,400)
Copyright	$67,600
Life of Copyright	16 Years
Annual Amortization	$4,225
Equity Income - 2017:
2017 basic equity income accrual ($162,000 * 30%)	$48,600
2017 Annual Amortization	($4,225)
Equity Income	$44,375
Equity Income - 2018:
2018 basic equity income accrual ($224,000 * 30%)	$67,200
2018 Annual Amortization	($4,225)
Equity Income	$62,975
b) Determining the Impact on Belden's Income, if Belden sells its entire investment in Sheffield:
Investment in Sheffield:
Purchase price - January 1, 2017	$316,000
2017 equity income (above)	$44,375
2017 Dividends ($86,000 * 30%)	($25,800)
2018 equity income above	$62,975
2018 Dividends ($94,000 * 30%)	($28,200)
Investment in Sheffield - 12/31/18	$369,350
Gain on sale of investment in Sheffield:
Sales price	$422,000
Book value 2019	$369,350
Gain on sale of investment	$52,650
Therefore, the Gain on sale of investment is $52650
c) Calculation of the Equity Income that Should Belden Recognize for the Year 2018:
2017 intra- entity gross profit to be recognized in 2018:
Ending inventory	$18,000
Gross profit percentage ($22140 / $54,000)	41%
Intra- entity gross profit	$7,380
Belden’s ownership	30%
Intra- entity gross profit recognized in 2018	$2,214
Deferral of 2018 intra-Entity ending inventory gross profit into 2019:
Ending inventory	$40,000
Gross profit percentage ($27140 / $59000)	46%
Intra-Entity gross profit	$18,400
Belden’s ownership	30%
Intra-Entity gross profit deferred	$5,520
Equity Income - 2018:
2018 equity income	$62,975
Recognition of 2017 intra-entity profit	$2,214
Deferral of 2018 intra-entity profit	($5,520)
Equity Income - 2018	$59,669