Chapter 1, Problem 12P

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