Question

# Matthew, Inc. owns 30 percent of the outstanding stock of Lindman Company and has the ability...

Matthew, Inc. owns 30 percent of the outstanding stock of Lindman Company and has the ability to significantly influence the investee’s operations and decision making. On January 1, 2018, the balance in the Investment in Lindman account is \$365,000. Amortization associated with this acquisition is \$12,600 per year. In 2018, Lindman earns an income of \$132,000 and declares cash dividends of \$33,000. Previously, in 2017, Lindman had sold inventory costing \$33,600 to Matthew for \$56,000. Matthew consumed all but 20 percent of this merchandise during 2017 and used the rest during 2018. Lindman sold additional inventory costing \$44,800 to Matthew for \$80,000 in 2018. Matthew did not consume 40 percent of these 2018 purchases from Lindman until 2019.

1. What amount of equity method income would Matthew recognize in 2018 from its ownership interest in Lindman?

2. What is the equity method balance in the Investment in Lindman account at the end of 2018?

a) Calculating amount of equity method income would Matthew recognize in 2018 from its ownership interest in Lindman

In 2018 Income = \$132,000
Dividend =  \$33,000

Unrealised profit

= \$44,800 - 80,000

= 35,200*40%

Unrealised profit = \$12,800

Profit = \$33,000- 12,800

= \$20200

Share in profits \$20200*30% = \$6060

Share of dividend \$33,000*30%= \$9,900

b) Calculating equity method balance in the Investment in Lindman account at the end of 2018

1 jan 2018 investment = \$365,000

Amortisation per year = \$ 12,600

Investment value 2018 end = \$352,400

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