Question

Alex inc. buys 30 percent of Steinbart company on January 1, 2017 for $544,000. Equity method is to be used. Steinbart's net assets on that date were $1.5 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: YEAR 2017 2018 Cost to Steinbart $123,000 145,530 Transfer Price $164,000 220,500 Amount held by Alex at Year end (at transfer price) 41,000 68,500 Inventory held at year-end will be sold beginning of next year. Steinbart's Net Income for 2017 is $104,000 and 2018 is 137,300. $40,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018? a) 27,768 b) 32,578 c) 42,178 d) 46,078

Answer 1

Solution: $32,578

Working:

Purchase price of Steinbart shares 544,000

BV of Steinbart shares ($1,500,000 * 30%) -450,000

Trade name 94,000

Life of trade name 20 years

Annual amortization 4,700

2014: Gross profit rate : $41,000/$164,000 25%

2015: Gross profit rate : $74,970/$220,500 34%

Income accrual ($137,300*30%) 41,190

Annual amortization -4700

Reconisation of 2017 unrealised gross profit 3075

($41,000*25%*30% ownership)

Deferral of 2018 unrealised gross profit -6987

($68,500 * 34% * 30% ownership)

Equity income in Steinbart 2018 32,578