BuyCo, Inc. holds 25 percent of the outstanding shares of Marqueen company and a

Question

BuyCo, Inc. holds 25 percent of the outstanding shares of Marqueen company and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $10,800 per year. For 2017, Marqueen reported earnings of $102,000 and declares cash dividends of $30,000. During that year, Marqueen acquired inventory for $54,000, which it then sold to BuyCo for $75,000. At the end of 2017, BuyCo continued to hold merchandise with a transfer price of $29,000.

What Equity in Investee Income should BuyCo report for 2017?

How will the intra-entity transfer affect BuyCo's reporting in 2018?

If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?

Explanation / Answer

a). Equity in investee income :-

Working Note 1:-

Deferral of intraentity gross profit :-

b). The deferral of $2030 will likely become realized in 2015 due to company BuyCo. use or sale of inventory.

Thus, The equity accrual for 2018 will be increased by $2030.

c). The direction (upstream versus downstream) of the intra­entity transfer does not affect the above answers.

However as discussed in Chapter Five, a controlling interest calls for a 100% gross profit deferral for downstream

intra­entity transfers.

In the presence of only significant influence, however, equity method accounting is identical regardless of whether

an intra­ entity transfer is upstream or downstream

Equity income Accrual ($102000*25%) $25500 Less : Deferral of Infraentity gross profit (Working Note 1) ($2030) Less : Patent Amortization ($10800) Equity in investee income $12670

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