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.
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 Barringers asset and liability accounts are considered as equal to fair values except for a copyright whose value accounted for Andersons 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 Andersons 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? |
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