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, 2021, the balance in the Investment in Lindman account is $341,000. Amortization associated with this acquisition is $17,400 per year. In 2021, Lindman earns an income of $159,000 and declares cash dividends of $53,000. Previously, in 2020, Lindman had sold inventory costing $47,200 to Matthew for $59,000. Matthew consumed all but 25 percent of this merchandise during 2020 and used the rest during 2021. Lindman sold additional inventory costing $60,800 to Matthew for $80,000 in 2021. Matthew did not consume 40 percent of these 2021 purchases from Lindman until 2022. a. What amount of equity method income would Matthew recognize in 2021 from its ownership Interest in Lindman? b. What is the equity method balance in the Investment in Lindman account at the end of 2021? a Equity income Balance of investment in Lindman account b.

Answer 1

Answer

M-mathew

L-lindman

-a) Computation the amount of equity method income that M will recognize in 2021 from its ownership interest in L in the following manner:-

M's share in L's reported income (159000*30%)	$47700
Add: Intra entity gain recognized on transfer	$885
Less: Amortization associated with acquisition	$(11400)
Less:Intra-entity gain deferred on transfer	$(2304)
Equity income recognized by M in	$34881

In 2021, M will recognize $34881 of equity method income from its ownership interest in L.

Working Note:-

Intra-entity recognized on 2020 transfer has been computed as follows:-

Selling price of inventory sold by L to M in 2020	$59000
Less: Cost of inventory sold by L to M in 2020	$47200
Gross Profit	$11800
Percentage of inventory not consumed by M in 2020	0
Unrealized gross profit in 2020 ($11800*25%	$2950
M;s share in L's ownership	0
Unrealized intra-entity gain deferred from(2950*30%)	885

Intra-entity gain deferred on 2021 transfer has been computed as follows:-

Selling price of inventory sold by L to M in 2021	$80000
Cost of inventory sold by L to M in 2021	$60800
Gross Profit	$19200
Percentage of inventory not consumed by M in 2021	0
Unrealized gross profit in 2021 ($19200*40%)	$7680
M's share in L's ownership	0
Unrealized intra-entity gain deferred from ($7680*30%)	$2304

b-

The equity method balance in the investment in L account at the end of 2021 should be computed as follows:

Invenstment in L, 1/1/2021	$341000
Add:Equity income in	$34881
Less: Dividends received from L in (53000*30%)	$(15900)
Investment in L,12/31	$358881