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20. BuyCo holds 25 percent of the outstanding shares of Marqueen and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $10,000 per year. For 2014, Marqueen reported earnings of $100,000 and declares cash dividends of $30,000. During that year, Marqueen acquired inventory for $50,000, which it then sold to BuyCo for $80,000. At the end of 2014, BuyCo continued to hold merchandise with a transfer price of $32,000.
a. What Equity in Investee Income should BuyCo report for 2014?
b. How will the intra-entity transfer affect BuyCo’s reporting in 2015?
c. If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?
Expert Answer
- what equity in investee income should Buyco report for 2014?
| $ | |
| Equity in investee income | |
| Accrued Equity income ($100000*25%) | $25,000 |
| Less: Deferral of intraenity gross profit | |
| [32000*37.5%*25%(ownership percentage)] | -3000 |
| Less: patent Amortization | -10000 |
| $12,000 | |
| * Gross profit percentage : $30000/$80000 =37.5% | |
- How will intra entity transfer affect Buyco’s reporting in 2015?
in 2015, deferral income of $3000 can be recognizedby use or sale of the Buyco inventory. so equity accrual for 2015 has increased. Recognition of $3000 is delayed form from 2014 to 2015. 2015 is the year when the goods are sold to outside customers
- If Buy had sold the inventory to Marqueen, how would answers to (A) and (b) have changed?
The direction of sales does not affect the above answers. However, a controlling interest for 100% gross profit deferral for downstream.
Equity method of accounting is always similar regardless of fact whether an intra entity transfer is downstream or upstream.
