Question

BuyCo, Inc. holds 22 percent of the outstanding shares of Marqueen company and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $11,700 per year. For 2017, Marqueen reported earnings of $116,000 and declares cash dividends of $34,000. During that year, Marqueen acquired inventory for $45,000, which it then sold to BuyCo for $90,000. At the end of 2017, BuyCo continued to hold merchandise with a transfer price of $26,000.

1. What Equity in Investee Income should BuyCo report for 2017?

2. How will the intra-entity transfer affect BuyCo's reporting in 2018?

3. If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?

4. 	a. Equity in investee income b. Equity accrual for 2018 will be Yes or No    c. If the inventory was sold, would your answers above change? Yes or No

Answer 1

Ans:

a.	Equity in investee income	$10,960
b.	Equity accrual for 2018 will be -Yes	increased	by	$2,860
c.	If the inventory was sold, would your answer above change ?	No

Calculation/Feedback:

a.

Equity in investee income:
Equity income accrual ($116,000 × 22%)	$25,520
Less: Deferral of intra­ entity gross profit (below)	($2,860)
Less: Patent amortization (given)	($11,700)
Equity in investee income	$10,960

b. In 2018,

Calculate equity Accruals for 2018

Inventory at the end of the Year                                              $26000

Gross profit percentage90K-45K/90k                          50%

Profit with in remaining inventory                                 13000

Ownership Percentage                                                            22%

Deferral of intra Entity gross profit                               2860

c. The direction (upstream versus downstream) of the intra­entity transfer does not affect the above answers. However asdiscussed in Chapter Five, a controlling interest calls for a 100% gross profit deferral for downstream intra­entity transfers.In the presence of only significant influence, however, equity method accounting is identical regardless of whether an intra ­entity transfer is upstream or downstream.