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On January 1, 2020, Stream Company acquired 30 percent of the outstanding voting shares of Q-Video,...

On January 1, 2020, Stream Company acquired 30 percent of the outstanding voting shares of Q-Video, Inc., for $758,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.8 million and $750,000, respectively. A customer list compiled by Q-Video had an appraised value of $268,000, although it was not recorded on its books. The expected remaining life of the customer list was eight years with straight-line amortization deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill.

Q-Video generated net income of $288,000 in 2020 and a net loss of $136,000 in 2021. In each of these two years, Q-Video declared and paid a cash dividend of $10,000 to its stockholders.

During 2020, Q-Video sold inventory that had an original cost of $94,080 to Stream for $168,000. Of this balance, $84,000 was resold to outsiders during 2020, and the remainder was sold during 2021. In 2021, Q-Video sold inventory to Stream for $184,000. This inventory had cost only $138,000. Stream resold $92,000 of the inventory during 2021 and the rest during 2022.

For 2020 and then for 2021, compute the amount that Stream should report as income from its investment in Q-Video in its external financial statements under the equity method. (Enter your answers in whole dollars and not in millions. Do not round intermediate calculations.)

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Expert Solution

Particulars 2020 2021
Sales $168,000 $184,000
Cost of Goods Sold $94,080 $138,000
Gross Profit (W.N.-1) $73,920 $46,000
Gross Profit Percent (W.N.-2) 44% 25%
Inventory Remaining (W.N.-3) $84,000 $92,000
Unrealized gross profit in ending inventory (W.N.-4) $36,960 $23,000
Parent's Share 30% (W.N.-5) $11,088 $6,900
Particulars 2020 2021
Basic Equity Accrual (W.N.-6) $86,400 -$40,800
Amortization of customer list intangible (W.N.-7) -$10,050 -$10,050
Add: Unrealized profit of 2020 0 $11,088
Eliminate the deferred gross profit from upstream sales in 2020/2021 -$11,088 -$6,900
Equity in 2020/2021 earnings of Q-video $65,262 -$46,662

Working Notes:-

1. Gross profit = Sales - Cost of Goods Sold

   168,000- 94080= 73920

184000-138000= 46000

2. Gross profit percent = Gross Profit/ Sales*100

73920/16800*100= 44%

46000/184000*100= 25%

3. Inventory Remaining= Sales- Inventory Resold

168000-84000= 84000

184000-92000= 92000

4. Unrealized gross profit in ending inventory = Inventory Remaining*Gross profit percent

84000*44%= 36960

92000*25%= 23000

5. Parent's Share= Unrealized gross profit in ending inventory*30%

36960*30%= 11088

23000*30%= 6900

6. Basic Equity Accrual= Net income/loss*30%

288000*30%=86400

-136000*30%= -40800

7. Amortization of customer list intangible= Appraised Value/Expected remaining life of customer list*30%

268000/8*30%= 10050

ekkarill92 answered 1 year ago
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