Question

On January 1, 2017, Stream Company acquired 25 percent of the outstanding voting shares of Q-Video, Inc., for $640,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.6 million and $760,000, respectively. A customer list compiled by Q-Video had an appraised value of $366,000, although it was not recorded on its books. The expected remaining life of the customer list was six 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 $394,000 in 2017 and a net loss of $104,000 in 2018. In each of these two years, Q-Video declared and paid a cash dividend of $14,000 to its stockholders.

During 2017, Q-Video sold inventory that had an original cost of $102,000 to Stream for $150,000. Of this balance, $75,000 was resold to outsiders during 2017, and the remainder was sold during 2018. In 2018, Q-Video sold inventory to Stream for $184,000. This inventory had cost only $138,000. 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.)

of 2017 Equity income of 2018 Equity loss

Answer 1

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Consideration for 25%		$   640,000
For Balance 75%	640000/25*75	$1,920,000
Total Fair Value		$2,560,000
Less: Book Value of Assets		$1,600,000
Less: Book Value of Liabilities		$ -760,000
Excess of Fair Value	A	$1,720,000
to be allocated to:			Annual Dep/Amor
Customer List	B	$   366,000	$                 61,000
Goodwill	A-B-C	$1,354,000
Calculation of Equity Income:
			Year 2017	Year 2018
			Full Year	Full Year
Shauns Income for the Year			$               394,000	$-104,000
Shauns Income Post Acquisition	25%		$                 98,500	$ -26,000
Less: Customer List Amortization	25%		$                -15,250	$ -15,250
Less: Unrealized Profit from Upstream Transaction	Working below		$                  -6,000	$    -5,000
Add: Reversal of Unrealized Profit				$      6,000
Final Equity Income			$                 77,250	$ -40,250
Working for Unearlized Profit:	Year 2017	Year 2018
Inventory Sale Price	$           150,000	$   184,000
Inventory Cost	$           102,000	$   138,000
Gross Profit	$              48,000	$     46,000
Gross Margin	32.00%	25.00%
Unsold Goods at end of 2017	$              75,000	$     80,000
Unrealized Profit 75000*32%	$              24,000	$     20,000
Unrealized profit 25%	$                6,000	$        5,000