Question - Anderson acquires 10 percent of the outstanding voting shares of Barringer on January 1, 2009, for $92,000 and categorizes the investment as an available-for-sale security. An additional 20 percent of the stock is purchased on January 1, 2010, for $210,000, which gives Anderson the ability to significantly influence Barringer. Barringer has a book value of $800,000 at January 1, 2009, and records net income of $180,000 for that year. Barringer paid dividends of $80,000 during 2009. The book values of Barringer's asset and liability accounts are considered as equal to fair values except for a copyright whose value accounted for Anderson's excess cost in each purchase. The copyright had a remaining life of 16 years at January 1, 2009.
Barringer reported $210,000 of net income during 2010 and $230,000 in 2011. Dividends of $100,000 are paid in each of these years. Anderson uses the equity method.
(a) On comparative income statements issued in 2011 by Anderson for 2009 and 2010, what amounts of income would be reported in connection with the company's investment in Barringer?
(b) If Anderson sells its entire investment in Barringer on January 1, 2012, for $400,000 cash, what is the gain on sale of investment?
(c) Assume that Anderson sells inventory to Barringer during 2010 and 2011 as follows:
Year Cost to
Anderson Price to
Barringer Year-End Balance
(at Transfer Price)
2010 $35,000 $50,000 $20,000 (sold in following year)
2011 33,000 60,000 40,000 (sold in following year)
What amount of equity income should Anderson recognize for the year 2011?