Surrell Inc. owns 30% of the outstanding voting common stock of Vicker Co. and h
ID: 2451969 • Letter: S
Question
Surrell Inc. owns 30% of the outstanding voting common stock of Vicker Co. and has the ability to significantly influence the investee's operations and decision-making. On January 1, 2008, the balance in the Investment in Vicker Co. account was $402,000. Amortization associated with this acquisition is $10,800 per year. During 2008, Vicker earned net income of $108,000 and paid cash dividends of $36,000. Previously, in 2007, Vicker had sold inventory costing $28,800 to Surrell for $48,000. All but 25% of that merchansdise was consumed by Surrell during 2007. the remainder was used during the first few weeks of 2008. Additional sales of inventory were made to Surrell in 2008. Inventory costing $33,600 was transferred at a price of $60,000. 40% of this inventory was still on hand at the end of 2008.
What amount of equity income should Surrell report in 2008?
Please show how you arrived at your answer.
Explanation / Answer
Equity Investment in Vicker Co 402,000
Less; Amortisation 10,800
Cash dividend received(36,000*30%) 10,800
Value of equity investment at year end 380,400
Vicar sold inventory to Surrel for 48,000 costing 28,800 margin : (48,000-28,800) 19,200
Since thid inventory are not sold to third party directly consumed by Surrel profit cannot be recognised
Second sale : Inventory Cost : 33,600 transfered for 60,000 Margin (60,000 - 33,600 ) 26,400 .26,40/6000 = .44
Unsold inventory : 40 % ie (60,000*40% = 24,000) reverse profit recognised on
unsold portion: 24,000 *.44 = 10560
So reduce profit of Vicar :Margin received on intergroup sale for consumption 19,200
Margin on unsold stock 10,560
Profit after this adjustment (108,000 - 19,200 -10,560 ) = 78,240
Equity Income reported by Surrell in 2008 (78,240 *30 % ) = 23,472
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