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 $382,000. Amortization associated with this acquisition is $10,500 per year. In 2018, Lindman earns an income of $156,000 and declares cash dividends of $39,000. Previously, in 2017, Lindman had sold inventory costing $54,600 to Matthew for $78,000. Matthew consumed all but 20 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

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a.	Equity income accrual—2018	$156,000*30%	$      46,800
	Amortization—2018 (given)		$   (10,500)
	Intra-entity profit recognized on 2017 transfer	Working-1	$        1,404
	Intra-entity profit deferred on 2018 transfer	Working-2	$        3,672
	Equity income recognized by Matthew in 2018		$      41,376
	Working-1
	Gross profit rate (GPR) on 2017 transfer	$23,400/$78,000	30%
	Intra-entity gross profit:
	Remaining inventory	$78,000*20%	$      15,600
	GPR (above)		30%
	Ownership percentage		30%
	Intra-entity profit deferred from 2017 until 2018		1404
	Working-2
	GPR on 2018 transfer	$30,600/$90,000	34%
	Intra-entity gross profit:
	Remaining inventory	$90,000*40%	$      36,000
	GPR (above)		34%
	Ownership percentage		30%
	Intra-entity profit deferred from 2018 until 2019		3672
b.	Investment in Lindman, 1/1/18		$   382,000
	Equity income—2018 (see [a] above)		$      41,376
	Dividends—2018	$39,000*30%	$   (11,700)
	Investment in Lindman, 12/31/18		$   411,676