Posada Company acquired 7,000 of the 10,000 outstanding shares of Sabathia Company on January 1, 2010, for $840,000. The subsidiary’s total fair value was assessed at $1,200,000 although its book value on that date was $1,130,000. The $70,000 fair value in excess of Sabathia’s book value was assigned to a patent with a 5-year remaining life.
On January 1, 2012, Posada reported a $1,085,000 equity method balance in the Investment in Sabathia Company account. On October 1, 2012, Posada sells 1,000 shares of the investment for $191,000. During 2012, Sabathia reported net income of $120,000 and paid dividends of $40,000.
These amounts are assumed to have occurred evenly throughout the year.
a. How should Posada report the 2012 income that accrued to the 1,000 shares prior to their sale?
b. What is the effect on Posada’s financial statements from this sale of 1,000 shares?
c. How should Posada report in its financial statements the 6,000 shares of Sabathia it continues to hold?