Reference no: EM132479730

Point 1: On July 1, 2016, Killearn Company acquired 76,000 of the outstanding shares of Shaun Company for $18 per share. This acquisition gave Killearn a 25 percent ownership of Shaun and allowed Killearn to significantly influence the investee's decisions.

Point 2: As of July 1, 2016, 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. Killearn applies the equity method for its investment in Shaun.

Point 3: 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 2016, $604,200 in 2017, and $662,000 in 2018.

Point 4: In addition, Killearn sold inventory costing $131,400 to Shaun for $219,000 during 2017. Shaun resold $128,000 of this inventory during 2017 and the remaining $91,000 during 2018.

Question 1: Determine the equity income to be recognized by Killearn during each of these years.

Question 2: Compute Killearn's investment in Shaun Company's balance as of December 31, 2018.