Question
Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 on January 1, 2020. At the time, the book value of Fenton
Exeter Company acquires 35% of the voting stock of Fenton Corporation for $7,000,000 on January 1, 2020. At the time, the book value of Fenton was $20,000,000. During 2020, Fenton reported net income of $3,000,000 and declared and paid dividends of $500,000. Both companies have December 31 year-ends, and the fair value of the investment at year-end was $9,000,000. Exeter uses the equity method to report its investment in Fenton stock.
Now assume Exeters 2020 ending inventory contains $125,000 in merchandise purchased from Fenton, at a markup of 25% on cost. What is the impact on 2020 equity in net income?
a. $35,000 lower
b. $25,000 lower
c. $35,000 lower
d. $8,750 lower
Please show your calculation.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started