On July 1, 2007, Gibson Company acquired 75,000 of the outstanding shares of Miller Company for $12 per share. This acquisition gave Gibson a 35 percent ownership of Miller and allowed Gibson to significantly influence the investee's decisions.
As of July 1, 2007, the investee had assets with a book value of $2 million and liabilities of $400,000. At the time, Miller held equipment appraised at $150,000 above book value; it was considered to have a seven-year remaining life with no salvage value. Miller also held a copyright with a five-year remaining life on its books that was undervalued by $650,000. Any remaining excess cost was attributable to goodwill. Depreciation and amortization are computed using the straight-line method. Gibson applies the equity method for its investment in Miller.
Miller's policy is to pay a $1 per share cash dividend every April 1 and October 1. Miller's income, earned evenly throughout each year, was $550,000 in 2007, $575,000 in 2008, and $620,000 in 2009.
In addition, Gibson sold inventory costing $90,000 to Miller for $150,000 during 2008. Miller resold $80,000 of this inventory during 2008 and the remaining $70,000 during 2009.
a. Prepare a schedule computing the equity income to be recognized by Gibson during each of these years.
b. Compute Gibson's investment in Miller Company's balance as of December 31, 2009.
This question was asked on Sep 02, 2011.
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