Problem
On July 1, 2013, Killeam Company acquired 76,000 of the outstanding shares of Shaun Company for $18 per share. This acquisition gave Killeam a 25 percent ownership of Shaun and allowed Killeam to significantly influence the investee's decisions.
As of July 1, 2013, the investee had assets with a book value of $4 million and liabilities of $414,400. At the time, Shaun held equipment appraised at $431,200 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 $1,160,000. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are computed using the straight-line method. Killeam 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 $570,000 in 2013, $604,200 in 2014, and $662,000 in 2015.
In addition, Killearn sold inventory costing $131,400 to Shaun for $219,000 during 2014. Shaun resold $128,000 of this inventory during 2014 and the remaining $91,000 during 2015.
a. Determine the equity income to be recognized by Killeam during each of these years.
b. Compute Killeam's investment in Shaun Company's balance as of December 31, 2015.