Question

borgin inc. owns 30% of the outstanding voting common stock of burkes co. and has the ability to significantly influence the investee’s operations and decision-making. on january 1, 2021, the balance in the investment in burkes co. account was $402,000. amortization associated with the purchase of this investment is $8,000 per year. during 2021, burkes earned income of $108,000 and paid cash dividends of $36,000. previously in 2020, burkes had sold inventory costing $28,800 to borgin for $48,000. all but 25% of this merchandise was consumed by borgin during 2020. the remainder was used during the first few weeks of 2021. additional sales were made to borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. of this total, 40% was not consumed until 2022. what amount of equity income would borgin have recognized in 2021 from its ownership interest in burkes?

Answer 1

The amount of equity income is mathematically given as

CI= $22,672

This is further explained below.

What amount of equity income would Borgin have recognized in 2021 from its ownership interest in burkes?

Generally, The amount of capital income that Borgin would realize in 2021 as a result of the company's ownership stake in Burkes

CI = [(108,000 × 0.30) – 8,000 + [(48,000 – 28,800) × 0.25 × 0.30) – [(60,000 – 33,600) × 0.40 × 0.30)

CI= 24,400 + 1,440 – 3,168

CI= $22,672

In conclusion, the  amount of equity income

CI= $22,672

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