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 $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 $220,000 of net income during 2018. Dividends of $66,000 and $82,000 are declared and paid in 2017 and 2018, respectively. Belden uses the equity method.

A. 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?

B. If Belden sells its entire investment in Sheffield on January 1, 2019, for $440,000 cash, what is the impact on Belden's income?

C. 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	$34,020	$54,000	$18,000 (sold in following year)
2018	31,270	59,000	38,000 (sold in following year)

Answer 1

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Part a
	Allocation and annual amortization:
	Purchase price of 30 percent interest		$     320,000
	Net Book Value ($784,000*30%)		$   (235,200)
	Copyright		$       84,800
	Remaining life of Copyright		16 Years
	Annual Amortization		$          5,300
	Equity income—2017
	2017 basic equity income accrual ($172,000 × 30%)		$       51,600
	2017 excess fair over book value amortization (above)		$       (5,300)
	Equity income—2017		$       46,300
	Equity income 2018
	2018 basic equity income accrual ($220,000 × 30%)		$       66,000
	2018 excess fair over book value amortization (above)		$       (5,300)
	Equity income 2018		$       60,700
Part b
	Investment in Sheffield:
	Purchase price—January 1, 2017		$     320,000
	2017 equity income (above)		$       46,300
	2017 dividends ($66,000 × 30%)		$     (19,800)
	2018 equity income above		$       60,700
	2018 dividends ($82,000 × 30%)		$     (24,600)
	Investment in Sheffield—12/31/18		$     382,600
	Gain on sale of investment in Sheffield:
	Sales price (given)		$     440,000
	Book value 1/1/19 (above)		$   (382,600)
	Gain on sale of investment		$       57,400
Part c
	2017 intra-entity gross profit to be recognized in 2018:
	Ending inventory		$       18,000
	Gross profit percentage ($19,980/$54,000)		37.00%
	Intra-entity gross profit		$          6,660
	Belden’s ownership		30.00%
	Intra-entity gross profit recognized in 2018		$          1,998
	Deferral of 2018 intra-entity ending inventory gross profit into 2019:
	Ending inventory		$       38,000
	Gross profit percentage ($27,730 ÷ $59,000)		47.00%
	Intra-entity gross profit		$       17,860
	Belden’s ownership		30.00%
	Intra-entity gross profit deferred		$          5,358
	Equity Income—2018
	2018 equity income (part a above)		$       60,700
	Recognition of 2017 intra-entity profit (part c above)		$          1,998
	Deferral of 2018 intra-entity profit (part c above)		$       (5,358)
	Equity Income—2018		$       57,340