Matthew owns 30 percent of the outstanding stock of Lindman and has the ability
ID: 2599887 • 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 $372,000. Amortization associated with this acquisition is $11,700 per year. In 2015, Lindman earns an income of $106,500 and declares cash dividends of $35,500. Previously, in 2014, Lindman had sold inventory costing $47,600 to Matthew for $68,000. Matthew consumed all but 25 percent of this merchandise during 2014 and used the rest during 2015. Lindman sold additional inventory costing $59,400 to Matthew for $90,000 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? Answer is complete but not entirely correct. Equity income b. What is the equity method balance in the Investment in Lindman account at the end of 2015? Answer is complete but not entirely correct. s 404,332 2 Equity balanceExplanation / Answer
a) Calculation of Equity method income recognised in 2015 (Amount in $)
* Gross profit rate (GPR) on 2014 transfer [(68,000-47,600)/68,000] 30%
Intra entity gross profit:
Remaining Inventory (68,000*25%) $17,000
GPR = 30%, Ownership percentage = 30%
Intra entity profit deferred from 2014 until 2015 ($17,000*30%*30%) $1,530
**Gross profit rate (GPR) on 2015 transfer [(90,000-59,400)/90,000] 34%
Intra entity gross profit:
Remaining Inventory (90,000*40%) $36,000
GPR = 34%, Ownership percentage = 30%
Intra entity profit deferred from 2014 until 2015 ($36,000*34%*30%) $3,672
b) Calculation of equity method balance in investment in Lindman account (Amount in $)
Equity Balance = $379,458
Equity Income Accrual (2015) (106,500*30%) 31,950 Amortization 2015 (given) (11,700) Initial entity profit recognized on 2014 transfer* 1,530 Initial entity profit deferred on 2015 transfer** (3,672) Equity income recognized by Matthew in 2015 18,108