Cayman Inc. bought 30% of Maya Company on January 1, 2018 for $450,000. The equi

Question

Cayman Inc. bought 30% of Maya Company on January 1, 2018 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Cost to Maya Transfer Price Amount Held by Cayman at Year-End 2018 $ 30,000 $ 45,000 $9,000 2019 $ 48,000 $ 80,000 20,000 Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2018?

Explanation / Answer

Solution:

Sale from Maya to Cayman = $45,000

Cost to Maya = $30,000

Mark up on cost = ($45,000 - $30,000) / $30,000 = 50%

Inventory held by caymon supplied by maya at 2018 = $9,000

Unrealised profit in inventory = $9,000 * 50 / 150 = $3,000

Therefore Equity in Maya Income that should be reported by Cayman in 2018 = ($100,000 - $3,000) * 30% = $29,100

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