Question

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 $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 years at January 1, 2017. No goodwill resulted from Belden's share purchase.

Sheffield reported net income of $174,000 in 2017 and $254,000 of net income during 2018. Dividends of $94,000 and $76,000 are declared and paid in 2017 and 2018, respectively. Belden uses the equity method.

1. 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?

2. If Belden sells its entire investment in Sheffield on January 1, 2019, for $418,000 cash, what is the impact on Belden's income?

3. 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	$24,000	$40,000	$20,000 (sold in following year)
2018	32,330	61,000	40,000 (sold in following year)

Answer is complete but not entirely correct.

	a. Equity income 2017 $47,725selected answer correct Equity income 2018 $71,725selected answer correct b. Gainselected answer correct on sale of investment $388,450selected answer incorrect c. Equity income $65,524selected answer incorrect

Answer 1

a	Equity income 2017		$47725
	Equity income 2018		$71725
b	Gain	on sale of investment	$29550
c	Equity income	$68485

Part A

Allocation and annual amortization

Purchase price of 30 percent interest	320000
Net book value ($828,000 × 30%)	(248400)
Copyright	71600
Remaining life of copyright	÷16 years
Annual Amortization	$4475

Equity income—2017

2017 basic equity income accrual ($174,000 × 30%)	52200
2017 excess fair over book value amortization	(4475)
Equity income—2017	$47725

Equity income—2018

2018 basic equity income accrual ($254,000 × 30%)	76200
2018 excess fair over book value amortization	(4475)
Equity income—2018	$71725

Part B

Investment in Sheffield

Purchase price—January 1, 2017	320000
2017 equity income	47725
2017 dividends ($94,000 × 30%)	(28200)
2018 equity income	71725
2018 dividends ($76,000 × 30%)	(22800)
Investment in Sheffield—12/31/18	$388450

Gain on sale of investment in Sheffield

Sales price	418000
Book value 1/1/19	(388450)
Gain on sale of investment	$29550

Part C

2017 intra­entity gross profit to be recognized in 2018

Ending inventory	20000
Gross profit percentage ($(40000-24000) ÷ $40,000)	40%
Intra­entity gross profit	8000
Belden’s ownership	30%
Intra­entity gross profit recognized in 2018	2400

Deferral of 2018 intra­entity ending inventory gross profit into 2019

Ending inventory	40000
Gross profit percentage ($(61000-32330) ÷ $61,000)	47%
Intra­entity gross profit	18800
Belden’s ownership	30%
Intra­entity gross profit deferred	5640

Equity Income—2018

2018 equity income	71725
Recognition of 2017 intra­entity profit	2400
Deferral of 2018 intra­entity profit	(5640)
Equity Income—2018	$68485