Hager holds 30 percent of the outstanding shares of Jenkins and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $9,000 per year. For 2010, Jenkins reported earnings of $80,000 and pays cash dividends of $30,000. During that year, Jenkins acquired inventory for $50,000, which it then sold to Hager for $80,000. At the end of 2010, Hager continued to hold merchandise with a transfer price of $40,000.
a.What Equity in Investee Income should Hager report for 2010?
b.How will the intra-entity transfer affect Hager’s reporting in 2011?
c.If Hager had sold the inventory to Jenkins, how would the answers to (a) and (b) have changed?
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