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On July 1, 2016, Killearn Company acquired 130,000 of the outstanding shares of Shaun Company for...

On July 1, 2016, Killearn Company acquired 130,000 of the outstanding shares of Shaun Company for $21 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 $6 million and liabilities of $232,250. At the time, Shaun held equipment appraised at $183,750 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 $705,000. 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 $584,000 in 2016, $613,800 in 2017, and $673,600 in 2018. In addition, Killearn sold inventory costing $129,600 to Shaun for $216,000 during 2017. Shaun resold $119,000 of this inventory during 2017 and the remaining $97,000 during 2018. Determine the equity income to be recognized by Killearn during each of these years. Compute Killearn's investment in Shaun Company's balance as of December 31, 2018.

Equity income 2016  
Equity income 2017  
Equity income 2018  
b.   Investment in Shaun  

Business   Accounting   
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ANSWER

Date of Acquisition 01-Jul-16
% of Shares Acquired of Shaun 40%
Cost of Investment 2730000
Calculation of net Assets of Shaun
Book Value of Assets 6000000
Less: Liabilities 232250
Add: Increase in Value of Equipments 183750
Add: Increase in Value of Copyright 705000
Net Assets of Shaun 6656500
Proportionate portion - 40% 2662600
Cost of Investment 2730000
Goodwill 67400
Amortization in 5 years 13480
Calculation of Stock Profit to be Deducted
Cost of Goods Sold by Killearn to Shaun in 2017 129600
Sale Price 216000
Profit 86400
% of Profit on Cost 66.67%
% of Profit on Selling Price 40.00%
Sold by Shaun in 2017 119000
Closing Stock in 2017 97000
Stock Profit (97000*40%) 38800
Equity Income 2016
Share of Profit- 6 Months(July to Dec) 584000*6/12 292000
Less: Amortization (6740)
Equity Income 2016 285260
Equity Income 2017
Share of Profit 613800
Less: Amortization (13480)
Less: Stock Profit (38800)
Equity Income 2017 561520
Equity Income 2018
Share of Profit 673600
Less: Amortization (13480)
Equity Income 2018 660120
Investment Value as at Dec 31, 2018
Cost of Investment 2730000
Less: Pre Acquisition Profit-6 Months(Jan to June) 584000*6/12 (292000)
2438000
Add: Equity Income 285260
Add: Share Profit-2017 561520
Add: Share Profit-2018 660120
Less: Dividend Paid-2016 (130000)
Less: Dividend Paid-2017 (260000)
Less: Dividend Paid-2018 (260000)
Less: Stock Profit (38800)
Investment Value 3256100
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