Question

Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2013, for $102,520 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2014, for $235,900, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $890,000 at January 1, 2013, and records net income of $196,000 for that year. Barringer declared and paid dividends of $79,000 during 2013. 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, 2013.

Barringer reported $243,200 of net income during 2014 and $322,200 in 2015. Dividends of $116,000 are declared and paid in each of these years. Anderson uses the equity method.

a.	On its 2015 comparative income statements, how much income would Anderson report for 2013 and 2014?

     

b.	If Anderson sells its entire investment in Barringer on January 1, 2016, for $472,005 cash, what is the impact on Anderson’s income?

    

Assume that Anderson sells inventory to Barringer during 2014 and 2015 as follows:

Year	Cost to Anderson	Price to Barringer	Year-End Balance (at Transfer Price)
2014	$38,500	$55,000	$22,000 (sold in following year)
2015	35,750	65,000	44,000 (sold in following year)

c.	What amount of equity income should Anderson recognize for the year 2015?

    

Answer 1

Under Equity Method of Accounting, the Available for Sale Security is recoded initial at Cost but later on valued at Fair Value on each Balance Sheet date. Any gains or loss are recorded in the Income Statement. a. We will record in the 2013 and 2014 Income Statement the 10% and 20% share in Net Income of Barringer as computed below: Net Income Ownership Total Ownership Share in Net Income 2013 10% $10,252 $102,520 10% $235,900 20% 2014 30% 47,180 Dec. 31, 2013 Debit Credit Investment in $10,252 Balance Sheet Barringer Equity Income in Barringer $10,252 Income Statement

Cash Proceeds @ Jan.1, 2016 $472,005 Less: Acquisition Cost 2015 $102,520 235,900 2014 338,420 Gains on Sale of AFS Securities $133,585 All the unrealized gain from the purchase date of the AFS Security will now be realized and presented in the income statement

c. Dividend Income received is recorded as Debit to Investment in Affiliates and Credit to Equity Income in Investment: Balance Acquired sold Shares Shares of Carrying Value at Dec 31 Ownership Shares Jan. 1, 2013 $890,000 2013 979,000 $102,520 235,900 2014 $102,520 10% 38,500 299,920 26% 35,750 335,670 29% 1,174,800 1,174,800 2015 Journal Entry Net Income for $322,200 2015 Investment in Barringer 93,438 % 29% Equity Income in Barringer 93,438 Ownership Share in Net Income for 2015 $93,438