On January 1, 2011, Uncle Company purchased 80 percent of Nephew Company's capital stock for $500,000 in cash and other assets. Nephew had a book value of $600,000 and the 20 percent non-controlling interest fair value was $125,000 on that date. On January 1, 2010, Nephew had acquired 30 percent of Uncle for $280,000. Uncle's appropriately adjusted book value as of that date was $900,000.
Operating income figures (not including investment income) for these two companies follow. In addition, Uncle pays $20,000 in dividends to shareholders each year and Nephew distributes $5,000 annually. Any excess fair-value allocations are amortized over a 10-year period.
...................................................... Uncle ..................... Nephew
Year .............................................. Company ................. Company
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000 . . . . . . . . . . . . . $30,000
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 . . . . . . . . . . . . . . 40,000
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 . . . . . . . . . . . . . . 50,000
a. Assume that Uncle applies the equity method to account for this investment in Nephew. What is the subsidiary's income recognized by Uncle in 2013?
b. What is the non-controlling interest's share of the subsidiary's 2013 income?