On July 1, 2019, Killearn Company acquired 110,000 of the outstanding shares of Shaun Company for $14 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, 2019, the investee had assets with a book value of $5 million and liabilities of $620,000. At the time, Shaun held equipment appraised at $308,000 more than 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 $1,208,000. 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 $591,000 in 2019, $634,400 in 2020, and $682,400 in 2021. In addition, Killearn sold inventory costing $98,400 to Shaun for $164,000 during 2020. Shaun resold $117,000 of this inventory during 2020 and the remaining $47,000 during 2021.
On July 1, 2019, Killearn Company acquired 110,000 of the outstanding shares of Shaun Company for $14 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, 2019, the investee had assets with a book value of $5 million and liabilities of $620,000. At the time, Shaun held equipment appraised at $308,000 more than 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 $1,208,000. Any remaining excess cost was attributable to
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 $591,000 in 2019, $634,400 in 2020, and $682,400 in 2021.
In addition, Killearn sold inventory costing $98,400 to Shaun for $164,000 during 2020. Shaun resold $117,000 of this inventory during 2020 and the remaining $47,000 during 2021.
Required:
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Determine the equity income to be recognized by Killearn during each of these years.
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Compute Killearn’s investment in Shaun Company’s balance as of December 31, 2021.
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