Question

equity method journal entries with intercompany sales of inventory Assume that an investor owns 35% 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 investor’s balance sheet at $360,000. During the year, the investee reported net income of $110,000 and paid dividends of $20,000 to the investor. In addition, the investor sold inventory to the investee, realizing a gross profit of $36,000 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 year?

b. What is the balance of the Equity Investment at the end of the year?

c. Assume that the inventories are all sold in the following year, that the investee reports $160,000 of net income. How much equity income will the investor report for the following year?