Question

Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1, 2017, for $310,000, which gives Belden the ability to significantly influence Sheffield. Sheffield has a net book value of $808,000 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 $168,000 in 2017 and $222,000 of net income during 2018. Dividends of $76,000 and $62,000 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	$21,600	$40,000	$20,000 (sold in following year)
2018	29,500	59,000	40,000 (sold in following year)

Answer 1

	W.N
	Allocation and Annual Amortization
	Purchase Price (30% interest)	$   310,000
	Net Book Value (808000*30%)	$ -242,400
	Copyright	$     67,600
	Remaing life	16
	Annual Amortization	$       4,225
a		2017	2018
	Sheffield Net Income	$   168,000	$ 222,000
	Basic Equity Income @ 30%	$     50,400	$   66,600
	Excess Fair Value over Book Value Amortization	$      -4,225	$    -4,225
	Equity Income	$     46,175	$   62,375
b	Investment in Sheffield
	Purchase Price		$ 310,000
	Add: Equity Income
	2017	$     46,175
	2018	$     62,375	$ 108,550
	Less: Dividend
	2017 (76000*30%)	-22800
	2018 (62000*30%)	-18600	$ -41,400
	Investment in Sheffield - 12/31/18		$ 377,150
	Sale Price		$ 422,000
	Gain on Sale of Investment		$   44,850
	W.N
	Intra Entity
		2017	2018
	End. Inventory	$     20,000	$   40,000
	Gross Profit %	46%	50%
	Gross Profit	$       9,200	$   20,000
	Intra Entity Gross Profit @ 30%	$       2,760	$     6,000
c		2018
	Equity Income	$     62,375
	Intra Entity Profit
	2017 (recognized)	$       2,760
	2018 (Deferred)	$      -6,000
	Equity Income	$     59,135
	W.N
	Gross Profit %
	2017 = (40000-21600)/40000 = 46%
	2018 = (59000-29500)/59000 = 50%