Question

Matthew. Inc.. owns 30 percent of the outstanding stock of Lindman Company and has the ability to significantly influence the investee's operations and decision making. On January 1 2021, the balance in the investment in Lindman account is $335,000. Amortization associated with this acquisition is $9.000 per year. In 2021, Lindman earns an income of $90,000 and declares cash dividends of $30.000. Previously, In 2020, Lindman had sold inventory costing $24,000 to Matthew for $40.000. Matthew consumed all but 25 percent of this merchandise during 2020 and used the rest during 2021. Lindman sold additional inventory costing $28,000 to Matthew for $50,000 in 2021. Matthew did not consume 40 percent of these 2021 purchases from Lindman until 2022 a. What amount of equity method income would Matthew recognize in 2021 from its ownership interest in Lindman

Answer 1

Questions: a. What amount of equity method income would Matthew recognize in 2021 from its ownership interest in Lindman? 16,560

b. What is the equity method balance in the Investment in Lindman account at the end of 2021? 342,560

A) 30%*90,000=27,000

Less: annual amortization (given) -9,000

Add: Gross Profit from previous yrs

40,000*((40,000-24,000)/40,000)*25%*30%=1,200

Less: unrecognized Gross Profit for current yr. -50,000*((50,000-28,000)/50,000)*30%*40%= -2640

27,000-9,000+1,200-2,640= 16,560

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B) 90,000*30%=27,000

40,000-24,000=16,000*30%=4,800*30%=1,440

50,000-28,000=22,000*40%=8,800*30%=2,640

27,000+1,440-9,000-2,640=16,800

335,000+16,560-(30,000*30%)=342,560

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Answer 2

the amount of equity method is $16,560

Step-by-step explanation:

The computation of the amount of equity method income recognized in the year 2021 is shown below:

= Accrual equity income - amortization + intra entity profit recognized - intra entity profit deferred

= ($90,000 × 30%) - $9,000 + ($40,000 × 0.25 × 0.3 × 0.4) - ($50,000 × 0.4 × 0.44 × 0.3)

= 27,000 - $9,000 + $1,200 - $2,640

= $16,560

The 0.4 comes from

= $16,000 ÷ $40,000

= 0.4

And, 0.44 comes from

= $22,000 ÷ $50,000

= 0.44

hence, the amount of equity method is $16,560