BuyCo holds 25 percent of the outstanding shares of Marqueen and appropriately a
ID: 2489544 • 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 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. WHY DO YOU TAKE THE ENTIRE 10,000 FOR PATENT AMORITZATION, RATHER THAN TAKING THE 25% OWNERSHIP PERCENTAGE?
Explanation / Answer
Equity in investee income:
Equity income accrual ($100,000 * 25%)......................................... $25,000
Less: deferral of intra-entity unrealized gross profit (below)........ (3,000)
Less: patent amortization (given)...................................................... (10,000)
Equity in investee income............................................................. $12,000
Deferral of intra-entity unrealized gross profit:
Remaining inventory@end of year............................................. $32,000
Gross profit percentage (GP $30,000 / Sales $80,000)........... 37%
Profit within remaining inventory................................................. $12,000
Ownership percentage.................................................................. 25%
Intra-entity unrealized gross profit.......................................................... $ 3,000
a. In 2014, the deferral of $3,000 will likely become realized by BuyCo's use or sale of this inventory. Thus, the equity accrual for 2014 will be increased by $3,000 in that year. Recognition of this amount is simply being delayed from 2013 until 2014, the year actually earned.
we will take entire 10000 as an amortization as it is statutority amortized with out the effect of quantum of holding.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.