On July 1, 2016, Killearn Company acquired 102,000 of the outstanding shares of Shaun Company for $16 per share. This acquisition gave Killearn a 40 percent ownership of Shaun and allowed Killearn to significantly influence the investee's decisions.
As of July 1, 2016, the investee had assets with a book value of $4 million and liabilities of $830,750. At the time, Shaun held equipment appraised at $148,750 above book value; it was considered to have a seven-year remaining life with no salvage value. Shaun also held a copyright with a five-year remaining life on its books that was undervalued by $580,000. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are computed using the straight-line method. Killearn applies the equity method for its investment in Shaun.
Shaun's policy is to declare and pay a $1 per share cash dividend every April 1 and October 1. Shaun's income, earned evenly throughout each year, was $559,000 in 2016, $584,800 in 2017, and $643,200 in 2018.
In addition, Killearn sold inventory costing $105,600 to Shaun for $176,000 during 2017. Shaun resold $97,000 of this inventory during 2017 and the remaining $79,000 during 2018.
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Determine the equity income to be recognized by Killearn during each of these years.
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Compute Killearn's investment in Shaun Company's balance as of December 31, 2018
Homework Answers
a. Equity income 2016 - $84350
Equity income 2017 - $166,380
Equity income 2018 - $189,740
b. Investment in Shaun - $15,62,470
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