Question

Equity method journal entries with intercompany sales of inventory An investor owns 25% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor's balance sheet at $2,000,000. During the year, the investee reported net income of $800,000 and paid dividends of s200,000. In addition, the investor sold inventory to the investee, realizing a gross profit of $240,000 on the sale. At the end of the year, 30% of the inventory remained unsold by the investee. a. Provide the equity method journal entries required for the year Description Debit Credit Ta record the recognition of equity income. To record deferred profits in ending inventory. To record receipt of cividends. b. What is the balance of the Equity Investment at the end of the year? C. Assume that the inventories are all sold in the following year, that the investee reports $900,000 of net income. How much equity income will the investor report for the following year?

Answer 1

Coedit. Debit Description Invesiment. ininvestec 200,000 Equity in inveşta income Kiosucasd thu sucophitimaf £quity Income). 200,000 Equity in in vestecincome (frem part b) io ucomd defeamed Piot its in nding inerio 18,000 18,000 cash(acco00x25) Investmentim Invested (TO mecord aeceipt of dividend) 50.000 50,000 b) The balance of the Equity imveştment at the End of the ye ar învestmunt in imyeştee = 2,000,00 Equity income Equity incom accrual (800,000 xas) 200,000

Pagena@® x25%) Intra. Entity Paotit decloored (a40,000 x 30Y X25% 18,000 Equity Income acual Entity Profit decloored Equity încome = Intra- 200, 000 -18,000 182000 Investment in Imveste e 1,000,000 Equity Income 182,000 Dividends (s0,000) tquity Inveştmend at the End ofith your Equity încome accrual (900,c00 x25%.) 225000 Profit de ferred Cauo000 x30%. X25%) Pritra - Entity 18000 243000 Equity Income