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In: Accounting

Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2017, for...

Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2017, for $60,000,000, and treats it as an equity method investment. There were no basis differences. Lexmark reports total net income of $20,000,000 for the period 2017 - 2020, and $5,000,000 for 2021. Lexmark paid no dividends during the period 2017 – 2020 but paid $1,000,000 in dividends in 2021. The accounting year for both companies ends December 31. Lexmark sells merchandise to Konica at a markup of 30% on cost. The inventory balances held by Konica, purchased from Lexmark, are as follows.

Inventory Held by Konica; Purchased from Lexmark

December 31, 2020

$1,560,000

December 31, 2021

2,600,000

Required:

a.         Calculate equity in net income of Lexmark, reported on Konica’s 2021 income statement.

a)

1.76 million
b)

1.904 million
c)

2 million
d)

2.24 million

b.         Calculate investment in Lexmark, reported on Konica’s December 31, 2021 balance sheet

a)

69.36 million
b)

68 million
c)

60 million
d)

67.856 million

Solutions

Expert Solution

Answer -

Information Given -

Konica Company acquires 40% of the voting stock of Lexmark Corporation on January 1, 2017, for $60000000.

Lexmark reports total net income of $20000000 for the period 2017 - 2020, and $5000000 for 2021.

Lexmark paid $1000000 in dividends in 2021.

Lexmark sells merchandise to Konica at a markup of 30% on cost.

The Inventory balances held by Konica, purchased from Lexmark -

December 31, 2020 $1560000
December 31, 2021 $2600000

.

(a) -- Calculate equity in net income of Lexmark, reported on Konica’s 2021 income statement.

Answer -

Particulars Calculation Amount ($)
I. 40% of 2021 Net Income 40% * $5000000 2000000
II. Unconfirmed profit on upstream ending inventory 40% * [$2600000 - ($2600000/1.30)] 240000
III. Confirmed profit on upstream beginning inventory 40% * [$1560000 - ($1560000/1.30)] 144000
Equity in net income, 2021 I - II + III 1904000

Hence, Option - (b) is Correct.

.

(b) -- Calculate investment in Lexmark, reported on Konica’s December 31, 2021 balance sheet.

Answer -

Particulars Calculation Amount ($)
I. Investment balance as on January 1, 2017 Given in question 60000000
II. Konica's share of net income, 2017 - 2020 40% * $20000000 8000000
III.

Unconfirmed profit on upstream ending inventory,

December 31, 2020

 40% * [$1560000 - ($1560000/1.30)] 144000
IV. Investment balance as on December 31, 2020 I + II - III 67856000
V. Equity in net income, 2021 Calculated in Part - (a) 1904000
VI. Dividends paid by Lexmark Corporation in 2021 40% * $1000000 400000
Investment balance as on December 31, 2021 IV + V - VI 69360000

Hence, Option - (a) is Correct.

ekkarill92 answered 3 years ago
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