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 $372,000. Amortization associated with this acquisition is $11,700 per year. In 2018, Lindman earns an income of $106,500 and declares cash dividends of $35,500. Previously, in 2017, Lindman had sold inventory costing $47,600 to Matthew for $68,000. Matthew consumed all but 25 percent of this merchandise during 2017 and used the rest during 2018. Lindman sold additional inventory costing $59,400 to Matthew for $90,000 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?

Answer 1

a- Computation the amount of equity method income that M will recognize in 2015 from its ownership interest in L in the following manner:-

M's share in L's reported income (106500*30%)	$31950
Add: Intra entity gain recognized on 2017 transfer	$1530
Less: Amortization associated with acquisition	$(11700)
Less:Intra-entity gain deferred on 2018 transfer	$(3672)
Equity income recognized by M in 2018	$18108

In 2018, M will recognize $18108 of equity method income from its ownership interest in L.

Working Note:-

Intra-entity recognized on 2014 transfer has been computed as follows:-

Selling price of inventory sold by L to M in 2017	$68000
Less: Cost of inventory sold by L to M in 2017	$47600
Gross Profit	$20400
Percentage of inventory not consumed by M in 2017	0
Unrealized gross profit in 2017 ($20400*25%)	$5100
M;s share in L's ownership	0
Unrealized intra-entity gain deferred from 2017 to 2018 (5100*30%)	1530

Intra-entity gain deferred on 2018 transfer has been computed as follows:-

Selling price of inventory sold by L to M in 2018	$90000
Cost of inventory sold by L to M in 2018	$59400
Gross Profit	$30600
Percentage of inventory not consumed by M in 2018	0
Unrealized gross profit in 2018 ($30,600*40%)	$12240
M's share in L's ownership	0
Unrealized intra-entity gain deferred from 2018 to 2019 ($12,240*30%)	$3672

b-

The equity method balance in the investment in L account at the end of 2018 should be computed as follows:

Invenstment in L, 1/1/2018	$372000
Add:Equity income in 2018	$18108
Less: Dividends received from L in 2018 ($35,500*30%)	$(10650)
Investment in L,12/31/2018	$379458