Question

Cayman Inc. bought 30% of Maya Company on January 1, 2018 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Cost to Maya Transfer Price Amount Held by Cayman at Year-End 2018 $ 30,000 $ 45,000 $9,000 2019 $ 48,000 $ 80,000 20,000 Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year.

What is the balance in Cayman’s Investment in Maya account at December 31, 2018?

Answer 1

Gross Profit Ratio for inventory transferred in 2018 = (Transfer Price - Cost to Maya)/Transfer Price

= ($45,000 - $30,000)/$45,000 = $15,000/$45,000 = 1/3 rd of Sale Price

Amount of Profit in Closing Inventory of 2018 = $9,000*1/3 = $3,000

Cayman's share of Profit in inventory to be deducted from Investment = $3,000*30% = $900

Gross Profit Ratio for inventory transferred in 2019 = (Transfer Price - Cost to Maya)/Transfer Price

= ($80,000 - $48,000)/$80,000 = $32,000/$80,000 = 40% of Sale Price

Amount of Profit in Closing Inventory of 2019 = $20,000*40% = $8,000

Cayman's share of Profit in inventory to be deducted from Investment = $8,000*30% = $2,400

Calculation of Cayman's Investment in Maya Account at Dec 31, 2018 (Amts in $)

Balance as on Jan. 1, 2018	450,000
Add: Share in Profit of year 2018 ($100,000*30%)	30,000
Less: Dividends Received for 2018 ($40,000*30%)	(12,000)
Less: Profit Reserve in Closing Inventory	(900)
Balance as on Dec. 31, 2018	467,100
Add: Share in Profit of year 2019 ($120,000*30%)	36,000
Less: Dividends Received for 2019 ($40,000*30%)	(12,000)
Add: Profit Reserve in Opening Inventory	900
Less: Profit Reserve in Closing Inventory	(2,400)
Balance as on Dec. 31, 2019	489,600

Thus the balance in Cayman's Investment in Maya account at December 31, 2018 is $467,100.