Question

In: Accounting

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 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)

Solutions

Expert Solution

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

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,...
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...
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 $320,000, which gives Belden the ability to significantly influence Sheffield. Sheffield has a net book value of $804,000 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,...
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...
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for...
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $107,080 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $245,200, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $942,000 at January 1, 2013, and records net income of $220,000 for that year. Barringer declared and paid dividends of $92,000 during 2013. The book...
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for...
Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $108,740 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $251,750, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $937,000 at January 1, 2013, and records net income of $254,000 for that year. Barringer declared and paid dividends of $140,000 during 2013. The book...
Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2020....
Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2020. To obtain these shares, Flynn pays $400 (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the transaction. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The...
Glen Co. acquires 100 percent of the outstanding voting shares of Nutley Company on January 1,...
Glen Co. acquires 100 percent of the outstanding voting shares of Nutley Company on January 1, 2021. To obtain these shares, Glen pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Glen's stock had a fair value of $36 per share on that date. Glen also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Glen in stock issuance...
Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1,...
Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $334,900 in cash. The book value of Kinman's net assets on that date was $625,000, although one of the company's buildings, with a $70,800 carrying amount, was actually worth $135,550. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $147,500. Kinman sold inventory with an original cost of $77,700 to...
Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1,...
Harper, Inc. acquires 40 percent of the outstanding voting stock of Kinman Company on January 1, 2017, for $210,000 in cash. The book value of Kinman’s net assets on that date was $400,000, although one of the company’s buildings, with a $60,000 carrying amount, was actually worth $100,000. This building had a 10-year remaining life. Kinman owned a royalty agreement with a 20-year remaining life that was undervalued by $85,000. Kinman sold inventory with an original cost of $60,000 to...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT