Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity
ID: 2479379 • Letter: A
Question
Acker Inc. bought 40% of Howell Co. on January 1, 2010 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:
YEAR/ COST TO ACKER/ TRANSFER PRICE/ AMOUNT HELD BY HOWELL AT YEAR-END:
2010/ $55,000/ $75,000/ $15,000
2011/ $70,000/ $110,000/ $55,000
Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.
QUESTIONS & ANSWER. PLEASE EXPLAIN AND SHOW WORK. ALL ANSWERS ARE CORRECT SO PLEASE DONT STATE OTHERWISE. THANK YOU.
What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2010?
ANSWER: $1,600
What is the Equity in Howell Income that should be reported by Acker in 2010?
ANSWER: 38,400
What is the balance in Acker's Investment in Howell account at December 31, 2010?
ANSWER: 598,400
Explanation / Answer
EXPLANATION:1
1). What is the amount of unrealized intra-entity inventory profit to be deferred on december 31, 2010
here the cost of the inventory to the Ackor $55,000
Transfer price $75,000
Profit $20,000
Profit percentage ($20,000/$75,000)*100= 26.667%
Amount held be howell at year end $15,000. So it realized the profit in $15,000 at 26.667% is $4,000
so 40%*$4000 is $1600
2).What is the Equity in Howell income that should be reported by Acker in 2010?
Equity income of Acker in howell in 2010 is dividend income less unrealized profit
=$40,000-$1,600
=$38,400
3)What is the balance in Acker's investment in Howell account at December 31,2010?
Initial investment +$5,76,000
Add: equity income 40%*$1,00,000 $40,000
Less: Dividend Income 40%*$4,000 $1,600
Total $6,00,000
Less: unrealized Income $1600
Balance $5,98,400
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