Question

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 $335,000. Amortization associated with this acquisition is 9,000 per year. In 2015, Lindman earns an income of $90,000 and declares cash dividends of $30,000. Previously, in 2014, Lindman had sold inventory costing $24,000 to Matthew for $40,000. Matthew consumed all but 25 percent of this merchandise during 2014 and used the rest during 2015. Lindman sold additional inventory costing $28,000 to Matthew for $50,000 in 2015. Matthew did not consume 40 percent of these 2015 purchases from Lindman until 2016.

Required:
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?

Answer 1

Matthew and Lindman

a. Equity method Income for 2015:

Add 30% share of Lindman Income ($90,000 x 30%) = $27,000

Less share in unrealized profit in Inventory -2,640

Less share in cash dividends ($30,000 x 30%) -9,000

Less Amortization of cost of acquisition -9,000

Net Income from Investment in Lindman $6,360

b. Equity method balance in the Investment in Lindman account at the end of 2015:

Balance in Investment in Lindman account = $341,360

Step-by-step explanation:

a) Data and Calculations:

Matthew owns 30% percent in Lindman with significant influence

Accounting of ownership interest: Equity Method

1/1/2015 Balance in the Investment in Lindman account = $335,000

Add 30% share of Lindman Income ($90,000 x 30%) = 27,000

Less share in unrealized profit in Inventory -2,640

Less share in cash dividends ($30,000 x 30%) -9,000

Less Amortization of cost of acquisition -9,000

Balance in Investment $341,360

b) Unrealized profit in Inventory:

Profit in Inventory = $22,000 ($50,000 - 28,000)

Less Realized profit 13,200 ($22,000 x 60%)

Unrealized profit 8,800 ($22,000 x 40%)

Share of Unrealized profit $2,640 ($8,800 x 30%)

c) Matthew uses the equity method for accounting for its 30% acquisition of the outstanding stock of Lindman because it is within the 20% to 50% band for accounting for investment in a subsidiary with the method. Secondly, Matthew has significant influence in Lindman's operations and decision making, making it additionally qualified for the equity method.

With this method, Matthew takes into account its 30% share in the Net Income of Lindman and adjusts this with its share of any unrealized profit (loss) in inventory arising from intercompany transactions. Since Lindman has declared a cash dividend of $30,000, Matthew's share from the dividend is subtracted from the share in net income of Lindman. The amortization cost associated with the acquisition of 30% share in Lindman is also subtracted to arrive at the net income due to Matthew, which increases its equity balance.