Question

Matthew, Inc. owns 30 percent of the outstanding stock of Lindman Company and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2018, the balance in the Investment in Lindman account is $341,000. Amortization associated with this acquisition is $17,400 per year. In 2018, Lindman earns an income of $159,000 and declares cash dividends of $53,000. Previously, in 2017, Lindman had sold inventory costing $47,200 to Matthew for $59,000. Matthew consumed all but 25 percent of this merchandise during 2017 and used the rest during 2018. Lindman sold additional inventory costing $60,800 to Matthew for $80,000 in 2018. Matthew did not consume 40 percent of these 2018 purchases from Lindman until 2019.

1. What amount of equity method income would Matthew recognize in 2018 from its ownership interest in Lindman?

2. What is the equity method balance in the Investment in Lindman account at the end of 2018?

Answer 1

Ans-a- Computation the amount of equity method income that M will recognise in 2018 from its ownership interest in L in the following manner:-
M's share in L's reported income ($159,000*30%)	$47,700
Add:Intra entity gain recognized on 2017 transfer	$885
Less: Amortization associated with acquisition	($17,400)
Less:Intra--entity gain deferred on 2018 transfer	($2,304)
Equity income recognized by M in 2018	$28,881
In 2018, M will recognised $18,594 of equity method income from its ownership interest in L.
Working Note:-
Intra- entity recognized has been computed as follows:-
Selling price of inventory sold by L to M in 2017	$59,000
Less: Cost of inventory sold by L to M in 2017	$47,200
Gross Profit	$11,800
Percentage of inventory not consumed by M in 2017	0
Unrealized gross profit in 2017 ($11,800*25%)	$2,950
M;s share in L's ownership	0
Unrealized intra- entity gain deferred from 2017 to 2018 ($2950*30%)	$885
Intra- entity gain deferred on 2018 transfer has been computed as follows:-
Selling price of inventory sold by L to M in 2018	$80,000
Cost of inventory sold by L to M in 2018	$60,800
Gross Profit	$19,200
Percentage of inventory not consumed by M in 2018	0
Unrealized gross profit in 2018 ($19200*40%)	7,680
M's share in L's ownership	0
Unrealized intra -entity gain deferred from 2018 to 2019 ($7680*30%)	$2,304
Ans-b-
The equity method balance in the investment in L account at the end of 2018 should be computed as follows:
Investment in L, 1/1/2018	$341,000
Add:Equity income in 2018	$28,881
Less: Dividends received from L in 2018 ($53000*30%)	($15,900)
Investment in L,12/31/2018	$353,981