Matthew owns 30 percent of the outstanding stock of lindman and has the ability to significantly influence the investee’s operations and decision making. on january 1, 2015, the balance in the investment in lindman account is $382,000. amortization associated with this acquisition is $10,500 per year. in 2015, lindman earns an income of $156,000 and declares cash dividends of $39,000. previously, in 2014, lindman had sold inventory costing $54,600 to matthew for $78,000. matthew consumed all but 20 percent of this merchandise during 2014 and used the rest during 2015. lindman sold additional inventory costing $59,400 to matthew for $90,000 in 2015. matthew did not consume 40 percent of these 2015 purchases from lindman until 2016.

a. what amount of equity method income would matthew recognize in 2015 from its ownership interest in lindman?

b. what is the equity method balance in the investment in lindman account at the end of 2015?

Explanation:

A. The amount of equity method income is calculated:

Equity Income Accrual   2015 (156,000*30%)46,800

Less Amortization 2015(10,500)

Add Intra-Entity Profit Recognized on 2014 Transfer1,404

Less Intra-Entity Profit Deferred on 2015 Transfer(3,672)

Equity Income Recognized by Matthew in 2015$34,032

Gross Profit Rate on 2014 Transfer [(78,000 – 54,600)/78,000]=30.00%

Unrealized Gross Profit:  

Remaining Inventory (78,000*20%)=15,600

Intra-Entity Profit Deferred from 2014 until 2015 (15,600*30%*30%)= $1,404

Gross Profit Rate on 2015 Transfer [(90,000 – 59,400)/90,000]=34.00%

Unrealized Gross Profit:  

Remaining Inventory (90,000*40%)=36,000

Intra-Entity Profit Deferred from 2015 until 2016 (36,000*34%*30%)=$3,672

B.

The equity method balance is calculated as follows:

Investment in Lindman 1/1/2015382,000

Add Equity Income (from Part A)34,032

Less Dividends (39,000*30%)(11,700)

Investment in Lindman 31/1/2015$404,332

(a) The amount of equity method income Mattew would recognize is $428,800, (b) The equity method balance in investment at the end of 2015 is $406,600

Explanation:

Journal entry

Original investment

Dr : Equity method investment $ 382,000

Cr : Cash $382,000

Share of net income

30% of $156,000

= 30÷100 = 0.3

= 0.3 × 156,000

= $46,800

Journal entry for equity method income

Dr: Equity method investment $46,800

Cr: Equity method income $46,800

Equity method investment Account carrying value

$

Initial investment cost 382,000

Add: Share of net income 46,800

Income. 428,800

Equity method dividend

30% of $39,000

= 0.3 × 39,000

= $11,700

Journal entry for Equity method dividend

Dr: Cash $11,700, Cr: Equity method investment $11,700

Equity method inventory

20% of inventory consumed = 0.2 × 78,000 = $15,600

Cost - Amount consumed = (78,000 - 15,600)

= 62,400

40% of inventory consumed = 0.4 × 90,000 = 36,000

Cost - Amount consumed =(90,000 - 36,000)

=54,000

Journal entry for Equity method Inventory 2014

Dr: Amount consumed $15,600, Dr: Balance $62,400

Cr: Merchandise $78,000

Journal entry for Equity method Inventory 2015

Dr: Amount consumed $36,000, Dr Balance $54,000

Cr: Merchandise $90,000

Equity method investment carrying value in the Balance sheet

$

Initial investment. 382,000

Less: Amortization. 10,500

371,500

Add: Share of net income 46,800

418,300

Less : Dividend Received 11,700

Balance. 406,600

answer; signaling;