Answered: Amount Held by Alex at Year-End (at…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity method of accounting is to be used. Steinbart’s net assets on that date were $1.2 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:
Inventory held at the end of one year by Alex is sold at the beginning of the next.
Steinbart reports net income of $80,000 in 2017 and $110,000 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?
a. $34,050
b. $38,020
c. $46,230
d. $51,450

Amount Held by Alex
at Year-End
(at transfer price)
Year
Cost to Stelnbart
Transfer Price
2017
2018
$70,000
$100,000
150,000
$25,000
96,000

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