Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2011, for $98,120 and categorizes the

investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2012, for $223,750, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $810,000 at January 1, 2011, and records net income of $266,000 for that year. Barringer paid dividends of $153,000 during 2011. 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, 2011. Barringer reported $311,200 of net income during 2012 and $464,200 in 2013. Dividends of $188,000 are paid in each of these years. Anderson uses the equity method. a. On comparative income statements issued in 2013 by Anderson for 2011 and 2012, what amounts of income would be reported in connection with the companys investment in Barringer?

Equity income 2011 Equity income 2012

$ $

25,530 89,680

b. If Anderson sells its entire investment in Barringer on January 1, 2014, for $471,660 cash, what is the impact on Andersons income? Gain on sale of investment $
27,100

c. Assume that Anderson sells inventory to Barringer during 2012 and 2013 as follows: Cost to Anderson $43,400 39,600 Price to Barringer $62,000 72,000 Year-End Balance (at Transfer Price) $24,800 (sold in following year) 49,600 (sold in following year)

Year 2012 2013

What amount of equity income should Anderson recognize for the year 2013? Equity income $
131,116

Explanation:

a. Allocation and annual amortizationfirst purchase

Purchase price of 10 percent interest Net book value ($810,000 10%) Copyright Life of copyright Annual amortization

98,120 (81,000)

17,120 16 years 1,070

Allocation and annual amortizationsecond purchase

Purchase price of 20 percent interest Net book value ($810,000 is increased by $266,000 income but decreased by $153,000 in dividend payments) ($923,000 20%) Copyright Life of copyright Annual amortization

223,750

(184,600) $ 39,150 15 years 2,610

Equity income2011 (after conversion to establish comparability)

2011 basic equity income accrual ($266,000 10%) 2011 amortization on first purchase (above) Equity income2011

26,600 (1,070)

25,530

Equity income2012

2012 basic equity income accrual ($311,200 30%) 2012 amortization on first purchase (above) 2012 amortization on second purchase (above) Equity income2012

93,360 (1,070) (2,610)

89,680

b. Investment in Barringer Purchase priceJanuary 1, 2011 2011 equity income (above) 2011 dividends ($153,000 10%) Purchase price January 1, 2012 2012 equity income (above) 2012 dividends ($188,000 30%) 2013 basic equity income accrual ($464,200 30%) 2013 amortization on first purchase (above) 2013 amortization on second purchase (above) 2013 dividends ($188,000 30%) Investment in Barringer12/31/13

98,120 25,530 (15,300) 223,750 89,680 (56,400) 139,260 (1,070) (2,610) (56,400)

444,560

Gain on sale of investment in Barringer

Sales price (given) Book value 1/1/14 (above) Gain on sale of investment

471,660

(444,560)

27,100

c. Deferral of 2012 unrealized gross profit into 2013

Ending inventory Gross profit percentage ($18,600 $62,000) Unrealized gross profit Andersons ownership Unrealized intra-entity gross profit

24,800

30%

7,440 30%

2,232

Deferral of 2013 unrealized gross profit into 2014

Ending inventory Gross profit percentage ($32,400 $72,000) Unrealized

49,600

45% $ 22,320

gross profit Andersons ownership Unrealized intra-entity gross profit $

30% 6,696

Equity income2013

2013 equity income accrual ($464,200 30%) 2013 amortization on first purchase (above) 2013 amortization on second purchase (above) Realization of 2012 intraentity profit (above) Deferral of 2013 intraentity profit (above) Equity Income2013

139,260

(1,070)

(2,610)

2,232

(6,696)

131,116