Question

Boardman, Inc. acquires 40% of the outstanding voting shares of Simon, Inc. on January 1, 2017, for $380,000, which gives Boardman the ability to significantly influence Simon. Simon has a net book value of $900,000 on January 1, 2017. Simon’s asset and liability accounts showed carrying amounts considered equal to fair values except for a copyright whose value accounted for Boardman’s excess cost over book value in its 40% purchase. The copyright had a remaining life of 10 years on January 1, 2017. No goodwill resulted from Boardman’s share of the purchase.

Simon reported net income of $240,000 in 2017 and $280,000 of net income during 2018. Dividends of $90,000 and $110,000 are declared and paid in 2017 and 2018, respectively. Boardman uses the equity method.

Required:

1. On its 2018 comparative income statements, how much income would Boardman report for 2017 and 2018 in connection with the company’s investment in Simon?
2. If Boardman sells its entire investment in Simon on January 1, 2019, for $700,000 cash, what is the impact on Boardman’s income?
3. Assume that Boardman sells inventory to Simon during 2017 and 2018 as follows:

Year	Cost to Boardman	Price to Simon	Year-end Balance (at transfer price)
2017	$40,000	$50,000	$20,000 (sold the following year)
2018	$48,000	$64,000	$30,000 (sold the following year)

What amount of equity income should Boardman recognize for the year 2018?

Answer 1

Q.1 : On its 2018 comparative income statements, how much income would Boardman report for 2017 and 2018 in connection with the company’s investment in Simon?

Response : This is the case of investment in associate where investment is more than 20% and investor can exercise significant influence and it is accounted under "equity" method.

The difference between book value and fair value of asset of investee company  is termed as "basis difference". The basis difference is depreciated or amortised over its useful life.

The total value of net asset in the books is 900,000 & 40% is acquired for 380,000. It is stated that the excess value over the accounted net asset is attributed to trademark which is 20,000 (380000-900000*40%) (Simon’s asset and liability accounts showed carrying amounts considered equal to fair values except for a copyright whose value accounted for Boardman’s excess cost over book value in its 40% purchase)

In view of the above the basis difference for Trademark is 20,000 & it has life of 10 years hence it needs to be amortised in 10 years & following will be amortisation :

Particulars		Year 2017	Year 2018
Trademark basis amortisation		2000	2000

Further there is inter company transaction. In case of inter-company transaction the unrealised profit needs to be ignored in view of this following is unrealised profit :

Particulars		Year 2017	Year 2018
Unsold Inventory		20000	30000
Profit Margin of transfer price		20%	20%
Unrealised Profit		4000	6000

Following will be income disclosure in comparative statement of Broadway :

Particulars		Year 2017	Year 2018
Net Income of Investment		240,000	280,000
Less : Unrealised Profit		(20,000)	(30,000)
Balance Profit		220,000	250,000
40% Share in Profit		88,000	100,000
Less : Trademark basis amortisation		(2,000)	(2,000)
Net income from Investment to be recognised in Broadway's books		86,000	98,000

Q.2 If Boardman sells its entire investment in Simon on January 1, 2019, for $700,000 cash, what is the impact on Boardman’s income?

Response :

Investment sale Income of Broadman = Sale value of Investment - Carrying value of Investment

Based on treatment in question no.1 following will be carrying value of investment in 2017 & 2018 in Balance sheet of Broadway

Particulars		Year 2017	Year 2018
Opening Balance		-	376,000
Initial Measurement		380,000	-
Add : Net Income during the year after trademark basis amortisation		86,000	98,000
Less : Dividend		(90,000)	(110,000)
Closing Balance		376,000	364,000

Hence the income of Broadway from sale of investment is 336,000 = 700,000-364,000