Matthew, Inc. owns 30 percent of the outstanding stock of Lindman Company and ha
ID: 2525656 • 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 $422,000. Amortization associated with this acquisition is $15,000 per year. In 2018, Lindman earns an income of $138,000 and declares cash dividends of $46,000. Previously, in 2017, Lindman had sold inventory costing $35,000 to Matthew for $50,000. Matthew consumed all but 25 percent of this merchandise during 2017 and used the rest during 2018. Lindman sold additional inventory costing $42,900 to Matthew for $65,000 in 2018. Matthew did not consume 40 percent of these 2018 purchases from Lindman until 2019.
What amount of equity method income would Matthew recognize in 2018 from its ownership interest in Lindman?
What is the equity method balance in the Investment in Lindman account at the end of 2018?
Explanation / Answer
a. Equity income accrual—2018 ($138000 × 30%) $41400
Amortization—2018 (given) (15000)
Intra-entity profit recognized on 2017 transfer* 1,125
Intra-entity profit deferred on 2018 transfer** (2,652)
Equity income recognized by Matthew in 2018 $24873
*Gross profit rate (GPR) on 2017 transfer ($15,000/$50,000) 30%
Intra-entity gross profit:
Remaining inventory (50,000 × 25%) $12500
GPR (above) × 30%
Ownership percentage × 30%
Intra-entity profit deferred from 2017 until 2018 $ 1125
**GPR on 2018 transfer ($22,100/$65,000) 34%
Intra-entity gross profit:
Remaining inventory (65,000 × 40%) $26000
GPR (above) × 34%
Ownership percentage × 30%
Intra-entity profit deferred from 2018 until 2019 $ 2,652
b. Investment in Lindman, 1/1/18 $422,000
Equity income—2018 (see [a] above) 24873
Dividends—2018 ($46,000 × 30%) (13800)
Investment in Lindman, 12/31/18 $433073