Accountancy 401 (Short Course)

Equity Method Problem 3

Internal Sales

On 1/1/X1, Byron Company purchased a 60% interest in Stephanie Company for $360,000. On the purchase date, Stephanie reported the following equity account balances:

Retained Earnings on 1/1/X1: 100,000

Capital Stock: par: 200,000

Additional Paid In Capital: 300,000

S's Total Equity (1/1/X1): 600,000

During year X1, S reported a $100,000 net income, but did not pay any dividends.

Included in Ss net income is gross from sales to Byron Company. The merchandise cost Stephanie $30,000 and was sold to Byron for $50,000.

As of 12/31/X1, Byron had managed to sell 30% of the merchandise to outside customers.

Required:

1. Prepare Byrons investment entries for year X1.

2. At what value should Byron report its investment in Stephanie as of 12/31.X1? Show calculations.

3. Assume that during year X2, Stephanie reported a $120,000 net income. No internal sales were made to Byron in year X1. Prepare Byrons investment entries for year X2.

4. At what value should Byron report its investment in Stephanie as of 12/31/X2? Show calculations.