Matthew owns 30 percent of the outstanding stock of Lindman and has the ability
ID: 2459306 • Letter: M
Question
Matthew owns 30 percent of the outstanding stock of Lindman and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2015, the balance in the Investment in Lindman account is $406,000. Amortization associated with this acquisition is $13,800 per year. In 2015, Lindman earns an income of $298,000 and declares cash dividends of $74,500. Previously, in 2014, Lindman had sold inventory costing $38,400 to Matthew for $48,000. Matthew consumed all but 25 percent of this merchandise during 2014 and used the rest during 2015. Lindman sold additional inventory costing $45,600 to Matthew for $60,000 in 2015. Matthew did not consume 40 percent of these 2015 purchases from Lindman until 2016.
a. What amount of equity method income would Matthew recognize in 2015 from its ownership interest in Lindman?
b. What is the equity method balance in the Investment in Lindman account at the end of 2015?
Explanation / Answer
Inventory sale Lindman to Matthew Year 2014 Year 2015 Inventory sale value 48,000.0 60,000.0 Cost Of Inventory 38,400.0 45,600.0 Profit on Inventory 9,600 14,400 % unrealized inventory at year end 25.0% 40.0% Amount of unrealized profit at year end 2,400 5,760 Movement in Unrealized profit in inventory in 2015 (3,360) Lindman Earning in 2015 298,000 Less Intergroup unrealized profit (3,360) Net Adjusted Profit 294,640 30 % share of Matthew 88,392 a Recognition of equity Income from Lindman in 2015 $ 88,392.00 Investment balance in Dec end. b Investment in Lindman on Jan 1 .2015 406,000 Equity Income form Lindman 2015 88,392 Less:30% dividend share from Lindman (22,350) Less : Yearly Amortization associated with acquisition (13,800) End of 2015 Balance of Matthew Investment in Lindman 458,242