Question

Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1, 2017, for $306,000, which gives Belden the ability to significantly influence Sheffield. Sheffield has a net book value of $784,000 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 $172,000 in 2017 and $250,000 of net income during 2018. Dividends of $96,000 and $92,000 are declared and paid in 2017 and 2018, respectively. Belden uses the equity method. 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? If Belden sells its entire investment in Sheffield on January 1, 2019, for $432,000 cash, what is the impact on Belden's income? 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 $32,240 $52,000 $20,000 (sold in following year) 2018 34,220 59,000 40,000 (sold in following year)

Answer 1

Solution :
working
a.	Equity income 2017	$47,175
	Equity income 2018	$70,575
b.	Gain on sale of investment	$64,650
c.	Equity income	$67,815
Working Notes:
a.	Purchase price of 30 percent interest	$    306,000
	Net book value ($784,000 × 30%)	$ (235,200)
	Copyright	$       70,800
	Divided by Remaining life of copyright	16	years
	Annual Amortization (Value of copyright / no. of years)	$         4,425
	2017 basic equity income accrual ($172,000 × 30%)	$       51,600
	2017 excess fair over book value amortization (above)	$       (4,425)
	Equity income—2017	$       47,175
	2018 basic equity income accrual ($250,000 × 30%)	$       75,000
	2018 excess fair over book value amortization (above)	$       (4,425)
	Equity income 2018	$       70,575
b.	Purchase price—January 1, 2017	$    306,000
	2017 equity income (as calculated above)	$       47,175
	2017 dividends ($96,000 × 30%)	$    (28,800)
	2018 equity income (as calculated above)	$       70,575
	2018 dividends ($92,000 × 30%)	$    (27,600)
	Investment in Sheffield—Dec. 31, 2018	$    367,350
	Sales price (Given)	$    432,000
	Book value 1/1/19 (as calculated above)	$ (367,350)
	Gain on sale of investment	$       64,650
c.	Ending inventory	$       20,000
	Gross profit percentage ($19,760 ÷ $52,000)	38.00%
	Intra-entity gross profit	$         7,600
	Belden’s ownership	30%
	Intra-entity gross profit recognized in 2018	$         2,280
	Ending inventory	$       40,000
	Gross profit percentage ($24,780 ÷ $59,000)	42.00%
	Intra-entity gross profit	$       16,800
	Belden’s ownership	30%
	Intra-entity gross profit deferred	$         5,040
	2018 equity income (part a above)	$       70,575
	Recognition of 2017 intra-entity profit (part c above)	$         2,280		ekkarill92 Next > < Previous Related Solutions Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1,... Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1, 2017, for $306,000, which gives Belden the ability to significantly influence Sheffield. Sheffield has a net book value of $784,000 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... Belden, Inc. acquires 30 percent of the outstanding voting shares of Sheffield, Inc. on January 1,... 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