Matthew, Inc. owns 30 percent of the outstanding stock of Lindman Company and ha
ID: 2332118 • Letter: M
Question
Matthew, Inc. owns 30 percent of the outstanding stock of Lindman Company and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2018, the balance in the Investment in Lindman account is $348,000. Amortization associated with this acquisition is $16,900 per year. In 2018, Lindman earns an income of $98,000 and declares cash dividends of $49,000. Previously, in 2017, Lindman had sold inventory costing $29,400 to Matthew for $42,000. Matthew consumed all but 25 percent of this merchandise during 2017 and used the rest during 2018. Lindman sold additional inventory costing $46,200 to Matthew for $70,000 in 2018. Matthew did not consume 40 percent of these 2018 purchases from Lindman until 2019.
a. What amount of equity method income would Matthew recognize in 2018 from its ownership interest in Lindman?
b. What is the equity method balance in the Investment in Lindman account at the end of 2018?
Explanation / Answer
Solution:
Answer a).
In 2018 Incom= $98,000
dividend= $(49,000)
= $49,000
Unrealised profit = $(46,200 - 70,000)
= (23,800)*40%
Unrealised profit = $(9,520)
Profit = $39,480
Share in profits $39,480*30% = $11,844
Share of dividend $49,000*30%= $14,700
Answer b).
1 jan 2018 investment = $348,000
Amortisation per year = $ 16,900
Investment value 2018 end = $331,100