Question
In: Accounting
Matthew, Inc., owns 30 percent of the outstanding stock of Lindman Company and has the ability...
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, 2021, the balance in the Investment in Lindman account is $341,000. Amortization associated with this acquisition is $17,400 per year. In 2021, Lindman earns an income of $159,000 and declares cash dividends of $53,000. Previously, in 2020, Lindman had sold inventory costing $47,200 to Matthew for $59,000. Matthew consumed all but 25 percent of this merchandise during 2020 and used the rest during 2021. Lindman sold additional inventory costing $60,800 to Matthew for $80,000 in 2021. Matthew did not consume 40 percent of these 2021 purchases from Lindman until 2022.
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What amount of equity method income would Matthew recognize in 2021 from its ownership interest in Lindman?
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What is the equity method balance in the Investment in Lindman account at the end of 2021?
Solutions
Expert Solution
Answer:
| Part 1: Computation the amount of equity method income that M will recognise in 2021 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 2020 transfer | $885 |
| Less: Amortization associated with acquisition | ($17,400) |
| Less:Intra--entity gain deferred on 2021 transfer | ($2,304) |
| Equity income recognized by M in 2021 | $28,881 |
| In 2021, 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 2020 | $59,000 |
| Less: Cost of inventory sold by L to M in 2020 | $47,200 |
| Gross Profit | $11,800 |
| Percentage of inventory not consumed by M in 2020 | 0 |
| Unrealized gross profit in 2020 ($11,800*25%) | $2,950 |
| M;s share in L's ownership | 0 |
| Unrealized intra- entity gain deferred from 2020 to 2021 ($2950*30%) | $885 |
| Intra- entity gain deferred on 2021 transfer has been computed as follows:- | |
| Selling price of inventory sold by L to M in 2021 | $80,000 |
| Less:Cost of inventory sold by L to M in 2021 | $60,800 |
| Gross Profit | $19,200 |
| Percentage of inventory not consumed by M in 2021 | 0 |
| Unrealized gross profit in 2021 ($19200*40%) | 7,680 |
| M's share in L's ownership | 0 |
| Unrealized intra -entity gain deferred from 2021 to 2022 ($7680*30%) | $2,304 |
| Part 2: | |
| The equity method balance in the investment in L account at the end of 2021 should be computed as follows: | |
| Investment in L, 1/1/2021 | $341,000 |
| Add:Equity income in 2021 | $28,881 |
| Less: Dividends received from L in 2021 ($53000*30%) | ($15,900) |
| Investment in L,12/31/2021 | $353,981 |
ekkarill92 answered 1 year agoRelated Solutions
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