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Killearn: Deferral of Intra-entity Gross Profit and more

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On July 1, 2016, Killearn Company acquired 88,000 of the outstanding shares of Shaun Company for $13 per share. This acquisition gave Killearn a 25 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 $3 million and liabilities of $74,400. At the time, Shaun held equipment appraised at $364,000 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 $972,000. 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 $598,000 in 2016, $639,600 in 2017, and $692,400 in 2018.

In addition, Killearn sold inventory costing $91,200 to Shaun for $152,000 during 2017. Shaun resold $92,000 of this inventory during 2017 and the remaining $60,000 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.

Create:
Schedule 1: Acquisition Price Allocation and Amortization
Schedule 2: Deferral of Intra-entity Gross Profit
Calculate equity income in 2016, 2017 and 2018.
Calculate the Investment in Milled at the end of 2018.

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Solution Summary

Schedules created in excel with formulas in cells for inspection of how it was computed.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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