BuyCo holds 25 percent of the outstanding shares of Marqueen and appropriately a
ID: 2375101 • Letter: B
Question
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 2012, Marqueen reported earnings of $100,000 and pays 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 2012, BuyCo continued to hold merchandise with a transfer price of $32,000.
What Equity in Investee Income should BuyCo report for 2012?
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 2012, Marqueen reported earnings of $100,000 and pays 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 2012, BuyCo continued to hold merchandise with a transfer price of $32,000.
Explanation / Answer
Hi,
Please find the answer as follows:
Equity in Investee Income to be reported by BuyCo = 100000*.25 = 25000
Gross Profit on Transferable Inventory = (80000 - 50000)/80000 = .375*32000 = 12000
Amount of Profit Made by the Co = 12000*.25 = 3000
Equity In Investee Income would be = 25000 - 10000 - 3000 = 12000
Answer is 12000
Thanks.
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