Alex, Inc., buys 30 percent of Steinbart Company on January 1, 2017, for $460,00

Question

Alex, Inc., buys 30 percent of Steinbart Company on January 1, 2017, for $460,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $1.30 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows: 10 points Amount Held by Alex at Year-End 02:19:41) Year cost to Steinbart Transfer Price (at Transfer Price) 2017 $73,440 105,600 $102,000 165,000 $25,500 50,000 2018 Skipped eBookInventory held at the end of one year by Alex is sold at the beginning of the next. Steinbart reports net income of $90,750 in 2017 and $122,550 in 2018 and declares $20,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

Explanation / Answer

Answer:- $30,007

Calculation:-

Purchase price of steinbart shares $460,000 Book value of steinbart shares ($13,00,000 × 30%) ($390,000) Trade name $70,000 Life of trade name 20 years Annual amortization $3500 2017 Gross profit rate =102,000 - 73,440 = 28,560/102,000 =28% 2018 Gross profit rate = 165,000 - 105,600 = 59400/165,000 = 36% 2018 equity income in steinbart: Income Accural (122,550 × 30%) $36,765 Amortization(above) ($3500) Recognization of 2017 Unrealized gain($25,500 × 28% GPR × 30% ownership ) $2142 Deferral of 2018 Unrealized gain($50,000 × 36%GPR × 30% ownership) ($5400) Equity income in steinbart $30,007

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