Question

On January 1, 2017, Stream Company acquired 27 percent of the outstanding voting shares of Q-Video, Inc., for $648,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.4 million and $708,000, respectively. A customer list compiled by Q-Video had an appraised value of $318,000, although it was not recorded on its books. The expected remaining life of the customer list was five 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 $392,000 in 2017 and a net loss of $100,000 in 2018. In each of these two years, Q-Video declared and paid a cash dividend of $12,000 to its stockholders.

During 2017, Q-Video sold inventory that had an original cost of $81,600 to Stream for $170,000. Of this balance, $84,000 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 $104,000 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.)

2017 Equity income of __

2018 Equity loss of __

Answer 1

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Equity Income 2017
Basic equity accrual	$392,000*27%	$                                                      105,840
Amortization (see Schedule 1)		$                                                      (17,172)
Deferral of intra-entity gross profit (see Schedule 2)		$                                                      (12,074)
Equity Income—2017		$                                                        76,594
Equity Income (Loss—2018)
Basic equity accrual	$100,000*27%	$                                                      (27,000)
Amortization (see Schedule 1)		$                                                      (17,172)
Realization of deferred gross profit (see Schedule 2)		$                                                        12,074
Deferral of intra-entity gross profit (see Schedule 3)		$                                                        (3,564)
Equity Loss—2018		$                                                      (35,662)
Schedule 1
Purchase price		$                                                      648,000
Less: Book value acquired	($1,400,000-$708,000)*27%	$                                                      186,840
Payment in excess of book value		$                                                      461,160
Excess payment identified with specific assets:			Life	Amortization
Customer list	$318,000*27%	$                                                        85,860	5 yrs.	$                17,172
Goodwill		$                                                      375,300	indefinite	$                          -
Total annual amortization				$                17,172
Schedule 2
Inventory remaining at December 31, 2017	$170,000-$84,000	$                                                        86,000
Gross profit percentage	($170,000-$81,600)/$170,000	52.00%
Total intra-entity gross profit		$                                                        44,720
Investor ownership percentage		27%
Intra-entity gross profit deferral—12/31/17		12,074
(To be deferred until 2018)
Schedule 3
Inventory remaining at December 31, 2018	$170,000-$104,000	$                                                        66,000
Gross profit percentage	($170,000-$136,000)/$170,000	20.00%
Total intra-entity gross profit		$                                                        13,200
Investor ownership percentage		27%
intra-entity gross profit deferral—12/31/18		3,564
(To be deferred until 2019)