Question

Problem 1-32 (LO 1-3, 1-4, 1-6) On January 1, 2017, Stream Company acquired 25 percent of the outstanding voting shares of Q-Video, Inc., for $788,000. Q-Video manufactures specialty cables for computer monitors. On that date. Q-Video reported assets and liabilities with book values of $1.8 million and $650,000, respectively. A customer list compiled by Q Video had an appraised value of $296,000, although it was not recorded on its books. The expected remaining life of the customer list was 5 years with a straight-line amortization deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill. Q-Video generated net income of $324,000 in 2017 and a net loss of $104.000 in 2018. In each of these two years. Q-Video declared and paid a cash dividend of $10,000 to its stockholders. During 2017, Q-Video sold inventory that had an original cost of $100.040 to Stream for $164.000. Of this balance. $82.000 was resold to outsiders during 2017, and the remainder was sold during 2018. In 2018, Q-Video sold inventory to Stream for $176,000. This Inventory had cost only $132,000. Stream resold $100,000 of the inventory during 2018 and the rest during 2019 For 2017 and then for 2018, compute the amount that Stream should report as income from its investment in Q-Video in its external financial statements under the equity method. (Enter your answers in whole dollars and not in millions. Do not round Intermediate calculations.) 2017 2018 Equity income Equity loss

Answer 1

Working as follows:

Intercompany Transactions: 2017
Particulars
Sales value	$164,000
Less: COGS	$100,040
Gross profit	$63,960
Gross profit percentage (Gross profit/sales)	39%
Inventory remaining ($164,000 - $82,000)	$82,000
Unrealized Gross profit in Ending Inventory ($82,000 × 39%)	$31,980
Stream Co. Share ($31,980 × 25%)	$7,995
Intercompany Transactions: 2018
Particulars
Sales value	$176,000
Less: COGS	$132,000
Gross profit	$44,000
Gross profit percentage (Gross profit/sales)	25%
Inventory remaining ($176,000 - $100,000)	$76,000
Unrealized Gross profit in Ending Inventory ($76,000 × 25%)	$19,000
Stream Co. Share ($19,000 × 25%)	$4,750

_____________________________________________________________________

Particulars	2017	2018
Equity accrual	$81,000	($26,000)
	($324000 × 25%)	($104000 × 25%)
Annual Amortization	($14,800)	($14,800)
($296,000 × 25% )/ 5 years
Add: Unrealized profit of 2017	-	$7,995
Eliminating deferred Gross profit from upstream sales (W.N)	($7,995)	($4,750)
Equity in Earning of Q-video	$58,205	($45,550)