Question
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
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 investors balance sheet at $400,000. During the year the investee reported net income of $100,000 and paid dividends of $60,000. 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 15% of the inventory remained unsold by the investee.
A. How much equity income should the investor report for the current year?
B. What is the balance of the equity investment at the end of the current year?
C. Assume the inventories are all sold in the following year, that the investee reports $150,000 of net income. How much equity income will the investor report for the following year?
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