Solution:
Equity Income 2013
Basic equity accrual ($640,000 x 1/2 year x 40%) $128,000
Amortization (1/2 year-see Schedule 1) (34,000)
Equity Income-2013 $94,000
Equity Income 2014
Basic equity accrual ($670,600 x 40%) $268,240
Amortization (see Schedule 1) (68,000)
Deferral of unrealized profit (see Schedule 2) (15,760)
Equity Income-2014 $184,480
Equity Income 2015
Basic equity accrual ($735,200 x 40%) $294,080
Amortization (see Schedule 1) (68,000)
Recognition of deferred profit (see Schedule 2) 15,760
Equity Income-2015 $241,840
Schedule 1-Acquisition Price Allocation and Amortization
Acquisition price (105,000 x $19) $1,995,000
Book value acquired ($3,898,500 x 40%) 1,559,400
Payment in excess of book value $435,600
Remaining Annual
Excess payment identified with specific assets: Life Amortization
Equipment ($280,000 x 40%) $112,000 7 yrs. $16,000
Copyright ($650,000 x 40%) 260,000 5 yrs. 52,000
Goodwill 63,600 indefinite -0-
Total annual amortization (full year) $68,000
Schedule 2-Deferral of Unrealized Intra-entity Gross Profit
Intra-entity Gross Profit Percentage:
Sales $203,000
Cost of goods sold 121,800
Gross profit $ 81,200
Gross profit percentage: $81,200/ $203,000 = 40%
Inventory remaining at December 31, 2014 $98,500
Gross profit percentage = 40%
Total profit on intra-entity sale still held by affiliate $39,400
Investor ownership percentage = 40%
Unrealized intra-entity gross profit deferred from
2014 until 2015 $ 15,760
b. Investment in Shaun-December 31, 2015 balance
Acquisition price $1,995,000
2013 Equity income (above) 94,000
2013 Dividends declared during half year (105,000 shares x $1.00) (105,000)
2014 Equity income (above) 184,480
2014 Dividends declared (105,000 shares x $1.00 x 2) (210,000)
2015 Equity income (above) 241,840
2015 Dividends declared (105,000 shares x $1.00 x 2) (210,000)
Investment in Shaun-12/31/15 $1,990,320
