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7 June, 19:42

Alex, Inc., buys 30 percent of Steinbart Company on January 1, 2017, for $622,000. The equity method of accounting is to be used. Steinbart's net assets on that date were $1.80 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 Cost to Steinbart Transfer Price Amount Held by Alex at Year-End (at Transfer Price) 2017 $72,800 $104,000 $26,000 2018 128,100 210,000 65,000 Inventory held at the end of one year by Alex is sold at the beginning of the next. Steinbart reports net income of $96,250 in 2017 and $126,450 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

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  1. 7 June, 20:08
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    2018 equity income 31,570 dollars

    Explanation:

    Recognition of intangible assets:

    Acquisition of 30% from Alex Inc 622,000

    Proportion of Steinbart's assets: 1,800,000 x 30% = 600,000

    Trade mark with 20 years of useful life: 22,000

    depreciation of tradmark per year:

    22,000 / 20 = 1,100 per year

    2017

    unrealized gain:

    The inventory Steinbart's didn't sale to independent entities will be considered unrealized gain from Alex Inc up to his proportion in Steinbart Company.

    104,000 - 72,800 = 31,200 total gross profit recognize in the transaciton

    we cross multiply to know the gain on 24,000 andthen, multiply by 30% which is Alex cut in Steinbart.

    26,000/104,000 x 31,200 x 30% = 2,340 unrealized gain

    Total for 2018

    income 126,450 x 30% = 37,935‬

    depreciation of trademark (1,100)

    Adjustment on unrealized gain:

    210,000 - 128,100 = 81,900

    65,000/210,000 x 81,900 x 30% = 7,605

    unrealized gain must be adjusted for: 7,605 - 2,340 = 5,265

    total for 2018:

    net income 37,935

    amortization of trademark (1,100)

    unrealized gain (5,265)

    total 31,570

    The dividend do not generate loss or income for Alex.
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