Question

On January 1, 2017, Stream Company acquired 27 percent of the outstanding voting shares of Q-Video, Inc., for $716,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.6 million and $800,000, respectively. A customer list compiled by Q-Video had an appraised value of $306,000, although it was not recorded on its books. The expected remaining life of the customer list was five years with a straight-line amortization deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill.

Q-Video generated net income of $304,000 in 2017 and a net loss of $112,000 in 2018. In each of these two years, Q-Video declared and paid a cash dividend of $18,000 to its stockholders.

During 2017, Q-Video sold inventory that had an original cost of $104,000 to Stream for $160,000. Of this balance, $80,000 was resold to outsiders during 2017, and the remainder was sold during 2018. In 2018, Q-Video sold inventory to Stream for $170,000. This inventory had cost only $136,000. Stream resold $100,000 of the inventory during 2018 and the rest during 2019.

For 2017 and then for 2018, compute the amount that Stream should report as income from its investment in Q-Video in its external financial statements under the equity method. (Enter your answers in whole dollars and not in millions. Do not round intermediate calculations.)

Answer 1

	2017	2018
Sales	1,60,000	1,60,000
COGS	1,04,000	1,36,000
Gross profit	56,000	24,000
Gross profit in %	35%	15%
Left inventory	80,000	60000
Unrealized GP in closing inventory	28000	9000
Parents share @27%	7560	2430
Basic equity accrual	82,080	(30,240)
	(304,000*27%)	(112000*27%)
Amortization of customer list
Intangible 2017	(306,000/5)*27%=$(16,524)	(16,524)
Add unrealized profit 2017	----------	7560
Eliminate deFerred Gp from upstream sales	(7,560)	(2430)
Equity in 2017/2018 earning of Q video	57,996	41634