TCO A) Adelman Company owns 45% of the outstanding voting common stock of Craig Corp. and...

TCO A) Adelman Company owns 45% of the outstanding voting common stock of Craig Corp. and has the ability to significantly influence the investee's operations. On January 3, 20X1, the balance in the Investment in Craig Corp. account was $462,000. Amortization associated with this acquisition is $10,000 per year. During 20X1, Craig earned a net income of $105,000 and paid cash dividends of $20,000. Previously in 20X0, Craig had sold inventory costing $28,000 to Adelman for $40,000. All but 20% of that inventory had been sold to outsiders by Adelman during 20X0. Additional sales were made to Adelman in 20X1 at a transfer price of $60,000 that had cost Craig $45,000. Only 10% of the 20X1 purchases had not been sold to outsiders by the end of 20X1.

Required:

(A) What amount of unrealized intra-entity inventory profit should be deferred by Adelman at December 31, 20X0?
(B) What amount of unrealized intra-entity profit should be deferred by Adelman at December 31, 20X1?
(C) What amount of equity income would Adelman have recognized in 20X1 from its ownership interest in Craig?
(D) What was the balance in the Investment in Craig Corp. account at December 31, 20X1?

Expert Solution

Sol:

(A)Amount of unrealized intra-entity inventory profit to be deferred by Adelman at December 31, 20X0
	Eliminating Gross Profit in Opening Inventory:
	(Sale Value-Cost)Inv %. At handShare of profits%
	(45,000-28,000)20%45%=		1,530

(B) Amount of unrealized intra-entity profit to be deferred by Adelman at December 31, 20X1
	Eliminating Gross Profit in 20X1 sales
	(Transfer Price -Cost)Inv %. At handShare of profits%
	(60,000-45000)10%45%=		675

C. Amount of equity income would Adelman have recognized in 20X1 from its ownership interest in Craig

(Craig 20X1 net Income*Share of profits)-Annual Amortization exp.-20X1 unrealised profit+20x0 unrealised profit
		(105,000 *45%)-10000-675+1530=		38,105

(D) Balance in the Investment in Craig Corp. account at December 31, 20X1

20X1 Opening Bal.+ Adj. as per C above- share of 20X1 dividends paid by Craig

	462,000+38,105-(20000*45%)=		410,105

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