Matthew owns 30 percent of the outstanding stock of Lindman and has the ability
ID: 2459838 • 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 $347,000. Amortization associated with this acquisition is $10,400 per year. In 2015, Lindman earns an income of $219,000 and declares cash dividends of $73,000. Previously, in 2014, Lindman had sold inventory costing $26,400 to Matthew for $44,000. Matthew consumed all but 25 percent of this merchandise during 2014 and used the rest during 2015. Lindman sold additional inventory costing $33,600 to Matthew for $60,000 in 2015. Matthew did not consume 40 percent of these 2015 purchases from Lindman until 2016.
What amount of equity method income would Matthew recognize in 2015 from its ownership interest in Lindman?
What is the equity method balance in the Investment in Lindman account at the end of 2015?
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
Answer: a)
Equity income accrual- 2015 (219000*30%) ............................................................65700
Amortization- 2015(given).....................................................................................(10400)
Intra- entity profit recognized on 2014 transfer* (see working note 1)..........................1320
Intra- entity profit deferred on 2015 transfer**(see working note 2)...............................(3168)
Equity income recognized by Mathew in 2015...........................................................53452
Working note # 1
Gross profit rate on 2014 transfer : (44000-26400)/44000 = 40%
Unrealized gross profit: Remaining inventory (44000*25%)= 11000
GPR (above)...................................................................40%
Ownership percentage......................................................30%
*Intra- entity profit deferred from 2014 untill 2015 = 11000*40%*30% = 1320
Working note #2
GPR on 2015 transfer :(60000 - 33600)/60000 = 44%
Unrealized gross profit: Remaining inventory (60000*40%)= 24000
GPR (above)...................................................................44%
Ownership percentage......................................................30%
**Intra- entity profit deferred from 2015 untill 2016 = 24000*44%*30% = 3168
Answer: b)
Investment in Lindamen, 1/1/15............................................347000
Equity income (see part a)....................................................53452
Dividend 2015 (73000*30%)..................................................(21900)
Investment in Lindamen, 12/31/15.........................................378552