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In: Accounting

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity...

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $1.2 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows:

Amount Held by Alex
at Year-End
(at Transfer Price)
2017 $70,000 $100,000 $25,000
2018 96,000 150,000

45,000

Inventory held at the end of one year by Alex is sold at the beginning of the next.

Steinbart reports net income of $80,000 in 2017 and $110,000 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

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Expert Solution

Purchase Cost - Steinbart Company          530,000
Book Value of Steinbart Shares - $1,200,000 X 40%          480,000
Trade Name            50,000
Annual Amortization - Trade Name - $50,000 / 20 Years              2,500
Gross Profit Rate - 2017 = $30,000 / $100,000 = 30%
Gross Profit Rate - 2018 = $54,000 / $150,000 = 36%
Equity Income in Steinbart - 2018
Income - $110,000 X 40%            44,000
Less: Amortization - Trade Name            (2,500)
Recognition of 2017 - Unrealized Gain - $25,000 X 30% X 40%              3,000
Less: Deferreal of 2018 Unrealized Gain - $45,000 X 36% X 40%            (6,480)
Equity Income in Steinbart - 2018            38,020

ekkarill92 answered 3 years ago
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