Equity method journal entries with intercompany sales of inventory Assume that an investor owns 30% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor’s balance sheet at $300,000. During the year, the investee reported net income of $100,000 and paid dividends of $20,000 to the investor. In addition, the investor sold inventory to the investee, realizing a gross profit of $40,000 on the sale. At the end of the year, 20% of the inventory remained unsold by the investee. Required a. How much equity income should the investor report for the year? $Answer b. What is the balance of the Equity Investment at the end of the year? $Answer c. Assume that the remaining inventory is sold in the following year and that the investee reports $150,000 of net income. How much equity income will the investor report for the following year? $Answer
Equity method
Assume that an investor owns 30% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor’s balance sheet at $300,000. During the year, the investee reported net income of $100,000 and paid dividends of $20,000 to the investor. In addition, the investor sold inventory to the investee, realizing a gross profit of $40,000 on the sale. At the end of the year, 20% of the inventory remained unsold by the investee.
Required
a. How much equity income should the investor report for the year?
$Answer
b. What is the balance of the Equity Investment at the end of the year?
$Answer
c. Assume that the remaining inventory is sold in the following year and that the investee reports $150,000 of net income. How much equity income will the investor report for the following year?
$Answer
The company invests in another company to make more earnings and grow. The company can use the equity method to account for the investment in another company. It is a method used by an investor company to account for the profit earned on an investment in another company.
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