Question

In: Accounting

Chapter one Case 1, please answer all Questions from 1-7 based on the following Case?

Chapter one Case 1, please answer all Questions from 1-7 based on the following Case?

Starge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1,2018, the balance in the Investment in Ticker Co. account was $ 403,159. Amortization associated with this acquisition is $8,111 per year. During 2018, Ticker earned an income of $ 108,899 and paid cash dividends of $ 36,897. Previously in 2017, Ticker had sold inventory costing $ 28,988 to Starge for $ 48,956. All but 25 % of this merchandise was consumed by Starge during 2017. The remainder was used during the first few weeks of 2018. Additional sales were made to Starge in 2018; inventory costing $33,987 was transferred at a price of $61,258. Of this total, 40% was not consumed until 2019.

1. What amount of equity income would S inc have recognized in 2018 from its ownership interest in T Inc.

Solutions

Expert Solution

Step 1:

1. Starge Inc owns 30% of voting shares in Ticker Inc .It means they can exercise significant control over the decision making activities in the Ticker Inc. This clearly tells us that Ticker Inc is an Associate company to Starge Inc.

2. In the above question ,there are inter company transactions . Starge Inc sold goods to Ticker Inc at their routine/ Arms length price. Starge Inc should make adjustments in their share of profits in Ticker Inc to arise at the amount of Equity income they would get from ownership interest in Ticker Inc in 2018.

Step 2:

Amount of Equity income would S Inc have recognized in 2018 from its ownership interest in Ticker Inc.

           Particulars Amount ($)
  Starge Inc share of Profit In Ticker  32670
          [ $1,08,899 x 30% ]  
        Add: Intra entity gain recognized from 2017 transfer 1498
      $(48,956 - 28,988) x 25% x 30%   
        Less: Amortization Associated with this Acquisition 8111
        Less: Intra entity gain deferred on current year transfer 3273
  (61,258 - 33987) x 40% x 30%  
     
  Equity income recognized in 2018 from its ownership interest in Ticker Inc 22784
     

Equity income recognized in 2018 from its ownership interest in Ticker Inc is $ 22,784.

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