Question

In: Accounting

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $1,028,000. The equity...

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $1,028,000. The equity method of accounting is to be used. Steinbart’s net assets on that date were $2.40 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:

Year Cost to Steinbart Transfer Price Amount Held by Alex
at Year-End
(at Transfer Price)
2017 $98,600 $116,000 $29,000
2018 170,820 219,000 68,000

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

Steinbart reports net income of $94,750 in 2017 and $128,250 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

Multiple Choice

  • $58,956.

  • $52,056.

  • $38,896.

  • $43,656.

Solutions

Expert Solution

Answer
The Correct Option is D : $ 43,656
Explanation
Purchase price of Steinbart Shares $1,028,000
Book Value of Steinbart Shares - $2,400,000 X 40% $   960,000
Trade Name $     68,000
Life of Trade Name - in Years 20
Amortization of Trade Name per Annum $       3,400
2017 - Gross Profit Rate - $17400 / $116,000 15%
2018 - Gross Profit Rate - $48180 / $219,000 22%
2018 - Alex Share in Steinbart Income - $128250 X 40% $     51,300
Less: Amortization of Trade Name per Annum -$       3,400
Add: Unrealized Gain on Inventory - 2017 - $29,000 X 15% (Gross profit) X 40% (Alex Share) $       1,740
Less: Deferral of 2018 Unrealized Gain - $68000 X 22% (Gross Profit) X 40% (Alex Share) -$       5,984
Equity Income in Steinbart $     43,656

ekkarill92 answered 2 years ago
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