Problem 1-30 (LO 1-3, 1-4, 1-6) July 1, 2016, Killearn Company acquired 102,000

Question

Problem 1-30 (LO 1-3, 1-4, 1-6) July 1, 2016, Killearn Company acquired 102,000 of the outstanding shares of Shaun Company for $16 per share. This acquisition gave Killearn a 40 percent ownership of Shaun and allowed Killearn to significantly influence the investee's decisions As of July 1, 2016, the investee had assets with a book value of $4 million and liabilities of $830,750. At the time, Shaun held equipment appraised at $148,750 above book value; it was considered to have a seven-year remaining life with no salvage value. also held a copyright with a five-year remaining life on its books that was undervalued by $580,000. Any remaining excess cost was attributable to goodwill Depreciation and amortization are computed using the straight-line method. Killearn a method for its investment in Shaurn Shaun's policy is to declare and pay a 51 per share cash dividend every April 1 and October 1 Shaun's income, earned evenly throughout each year, was $559,000 in 2016, $584,800 in 2017, and $643,200 in 2018. In addition, Killearn sold inventory costing $105,600 to Shaun for $176,000 during 2017. Shaun resold $97000 of this inventory during 2017 and the remaining $79,000 during 2018 o. Determine the equity income to be recognized by Killearn during each of these years (For all requirements, enter your answers in whole dollars and not in millions) ces in Shaun Company's balance as of December 31, 2018 a Equity income 2016 Equity income 2017 Equity income 2018 b. Investment in Shaun

Explanation / Answer

Date of Acquisition 01-Jul-16 % of Shares Acquired of Shaun 40% Cost of Investment $        1,632,000 Calculation of net Assets of Shaun Book Value of Assets $ 4,000,000.00 Less: Liabilities $      830,750.00 Add: Increase in Value of Equipments $      148,750.00 Add: Increase in Value of Copyright $      580,000.00 Net Assets of Shaun $ 3,898,000.00 Proportainate portion -40% $ 1,559,200.00 Cost of Investment $ 1,632,000.00 Goodwill $        72,800.00 Amortization in 5 years $        14,560.00 Calculation of Stock Profit to be Deducted Cost of Goods Sold by Killearn to Shaun in 2017 $      105,600.00 Sale Price $      176,000.00 Profit $        70,400.00 % of Profit on Cost 66.67% % of Profit on Selling Price 40.00% Sold by Shaun in 2017 $        97,000.00 Closing Stock in 2017 $        79,000.00 Stock Profit (79000*40%) $        31,600.00 Equity Income 2016 Share of Profit- 6 Months(July to Dec) 559000*6/12 $      279,500.00 Less: Amortization $        (7,280.00) Equity Income 2016 $      272,220.00 Equity Income 2017 Share of Profit $      584,800.00 Less: Amortization $        14,560.00 Less: Stock Profit $      (31,600.00) Equity Income 2017 $      567,760.00 Equity Income 2018 Share of Profit $      643,200.00 Less: Amortization $      (14,560.00) Equity Income 2018 $      628,640.00 Investment Value as at Dec 31, 2018 Cost of Investment $        1,632,000 Less: Pre Acquisition Profit-6 Months(Jan to June) 559000*6/12 $         (279,500) $        1,352,500 Add: Equity Income $            272,220 Add: Share Profit-2017 $            567,760 Add: Share Profit-2018 $            628,640 Less: Dividend Paid-2016 $         (102,000) Less: Dividend Paid-2017 $         (204,000) Less: Dividend Paid-2018 $         (204,000) Less: Stock Profit $            (31,600) Investment Value $ 2,279,520.00

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