Question

BuyCo, Inc., holds 25 percent of the outstanding shares of Marqueen Company and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $10,800 per year. For 2020, Marqueen reported earnings of $102,000 and declares cash dividends of $30,000. During that year, Marqueen acquired inventory for $54,000, which it then sold to BuyCo for $75,000. At the end of 2020, BuyCo continued to hold merchandise with a transfer price of $29,000.
1. What Equity in Investee Income should BuyCo report for 2017?
2. How will the intra-entity transfer affect BuyCo's reporting in 2018?
3. If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?

Answer 1

Answer and Explanation:

The computation is shown below:

a. The equity in investee income for the year 2017 is

Equity income Accrual ($102,000 × 25%) $25500

Less: Deferral of Infra-entity gross profit  ($2,030)

Less: Amortization of patent ($10,800)

Equity in investee income $12,670

Working Note:

For Deferral of intraentity gross profit :-

Ending Balance of Inventory  $29,000

Gross Profit Percentage (($75,000 - $54,000) ÷ $75,000) 28%

Profit within Remaining Inventory $8,120

Ownership Percentage 25%

Intraentity gross Profit Deferral $2,030

b. The intra-entity impact for the year 2018 is that yhe accrual equity would be increased by $2,030

c. In the case when the inventory is sold from BuyCo to Marqueen so the direction i.e. upstream or downstream would remain unaffected the above answers