Question

Anderson acquires 11 percent of the outstanding voting shares of Barringer on January 1, 2019, for $109,000 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2020, for $220,000, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $900,000 at January 1, 2019, and records net income of $140,000 for that year. Barringer paid dividends of $60,000 during 2019. The book values of Barringer's asset and liability accounts are considered as equal to fair values except for a copyright whose value accounted for Anderson's excess cost in each purchase. The copyright had a remaining life of 16 years at January 1, 2019. Barringer reported $200,000 of net income during 2020 and $250,000 in 2021. Dividends of $140,000 are paid in each of these years. Anderson uses the equity method. (A) On comparative income statements issued in 2021 by Anderson for 2019 and 2020, what amounts of income would be reported in connection with the company's investment in Barringer? (B) If Anderson sells its entire investment in Barringer on January 1, 2022, for $400,000 cash, what is the gain or loss on sale of investment? (C) Assume that Anderson sells inventory to Barringer during 2020 and 2021 as follows: Year 2020 2021 Cost to Anderson $40,000 35,000 Price to Barringer $70,000 60,000 Year-end balance $28,000 (sold following year) 48,000 (sold following year) What amount of equity income should Anderson recognize for the year 2021?

Answer 1