Question

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $1,458,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $3.40 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: Year 2017 2018 Cost to Steinbart $131,600 99,900 Transfer Price $188,000 166,500 Amount Held by Alex at Year-End (at Transfer Price) $47,000 50,500 Inventory held at the end of one year by Alex is sold at the beginning of the next. Steinbart reports net income of $99,250 in 2017 and $136,650 in 2018 and declares $20,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

Answer 1

Purchase price of Steinbart	$ 1,458,000
less: Book value of Steinbart	($ 1,360,000)
{ $ 3,400,000 * 40 % }
Trade name	$ 98,000
Life of trade name	20 years
Annual amortization {$98,000/20 years}	$ 4,900
Gross profit rate (GPR ) for 2017	30%
(Transfer price -Cost ) / Transfer price
(188,000-131,600 )/188,000
Gross profit rate (GPR) for 2018	40%
(Transfer price -Cost ) / Transfer price
(166,500-99,900 )/ 166,500
Equity income in Steinbart reported by Alex in 2018 :
Particulars	Amount ($)
Income accrual ($ 136,650 * 40 % )	$ 54,660
less: Annual amortization	($ 4,900 )
Recognition of unrealized gross profit for 2017	$ 5,640
($47,000 * 30% GPR* 40 % Ownership )
less: Deferral of unrealized gross profit for 2018	($8,080 )
($ 50,500 * 40 % GPR * 40 % Ownership )
Equity income in Steinbart in 2018	$ 47,320