John owns 30% of outstanding stock of Wally and has the ability to significanlty

Question

John owns 30% of outstanding stock of Wally and has the ability to significanlty influence the investee's operations and decision making. On Jan 1, 2011, the balance in the investment in Wally account is $335,000. Amortization associated with this acquisistion is $9000 per year. In 2011, Wally earns an income of $90000 and pays cas dividends of $30000. Previously in 2010, Wally had sold inventory costing $24,000 to John for $40000. Russel consumed all but 25% of this merchanidse during 2010 and used the rest during 2011. Wally sold additional inventory costing $28000 to John for $50,000 in 2011. John did not sonsume 40% of these 2011 purchases from Wally until 2012.

a) What amount of equity mehtod income would John recognize in 2011 from its ownership interest in Wally?

b) What is the equity method balance in the Investment in Wally account at the end of 2011?

Explanation / Answer

a) Equity method of income of John recognize 2011: Cash dividends                        $9,000 Amortion                                   9,000                                            __________ Total income                          18,000                                          ____________ b) Equity method balance in the investment in Walley account at the end of 2011. Income                                 $90,000 Less:Cash Dividends              30,000                                        ______________                                            60,000 Merchandise used               12,000                                   ________________                                            72,000 Profit on sale of inventory     22,000                                     _______________ Total                                   94,000

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