Question

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?

Answer 1

2018 equity income 31,570 dollars

Step-by-step 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.