Question

On January 1, 2017, Stream Company acquired 27 percent of the outstanding voting shares of Q-Video, Inc., for $716,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.6 million and $800,000, respectively. A customer list compiled by Q-Video had an appraised value of $306,000, although it was not recorded on its books. The expected remaining life of the customer list was 5 years with a straight-line amortization deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill.

Q-Video generated net income of $304,000 in 2017 and a net loss of $112,000 in 2018. In each of these two years, Q-Video declared and paid a cash dividend of $18,000 to its stockholders.

During 2017, Q-Video sold inventory that had an original cost of $104,000 to Stream for $160,000. Of this balance, $80,000 was resold to outsiders during 2017, and the remainder was sold during 2018. In 2018, Q-Video sold inventory to Stream for $170,000. This inventory had cost only $136,000. Stream resold $100,000 of the inventory during 2018 and the rest during 2019.

For 2017 and then for 2018, compute the amount that Stream should report as income from its investment in Q-Video in its external financial statements under the equity method. (Enter your answers in whole dollars and not in millions. Do not round intermediate calculations.)

Answer 1

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Equity Income 2017
Basic equity accrual	$304,000*27%	$                                                 82,080
Amortization	Schedule-1	$                                                -16,524
Deferral of intra-entity gross profit	Schedule-2	$                                                  -7,560
Equity Income—2017		$                                                 57,996
Equity Income (Loss—2018)
Basic equity accrual	$112,000*27%	$                                                -30,240
Amortization	Schedule-1	$                                                -16,524
Realization of deferred gross profit	Schedule-2	$                                                   7,560
Deferral of intra-entity gross profit	Schedule-3	$                                                  -4,050
Equity Loss—2018		$                                                -43,254
Schedule 1
Purchase price		$                                               716,000
Book value acquired	($1,600,000-$800000)*27%	$                                              -216,000
Payment in excess of book value		$                                               500,000
Excess payment identified with specific assets:			Life	Amortization
Customer List	$306,000*27%	$                                                 82,620	5 yrs.	$         16,524
Goodwill		$                                               417,380	indefinite	$                 -
Total annual amortization				$         16,524
Schedule 2
Inventory remaining at December 31, 2017		$                                                 80,000
Gross profit percentage ($56,000 ÷ $160,000)		35.00%
Total intra-entity gross profit		$                                                 28,000
Investor ownership percentage		27.00%
Intra-entity gross profit deferral—12/31/17		$                                                   7,560
Schedule 3
Inventory remaining at December 31, 2018		$                                                 75,000
Gross profit percentage ($34,000 ÷ $170,000)		20%
Total intra-entity gross profit		$                                                 15,000
Investor ownership percentage		27%
intra-entity gross profit deferral—12/31/18		$                                                   4,050