On January 1, 2017, Stream Company acquired 30 percent of the outstanding voting

Question

On January 1, 2017, Stream Company acquired 30 percent of the outstanding voting shares of Q-Video, Inc., for $720,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.8 million and $772,000, respectively. A customer list compiled by Q-Video had an appraised value of $298,000, although it was not recorded on its books. The expected remaining life of the customer list was 25 years with a straight-line amortization deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill. Q-Video generated net income of $370,000 in 2017 and a net loss of $116,000 in 2018. In each of these two years, Q-Video declared and paid a cash dividend of $18,000 to its stockholders. During 2017, Q-Video sold inventory that had an original cost of $100,040 to Stream for $164,000. Of this balance, $82,000 was resold to outsiders during 2017, and the remainder was sold during 2018. In 2018, Q-Video sold inventory to Stream for $180,000. This inventory had cost only $144,000. Stream resold $90,000 of the inventory during 2018 and the rest during 2019. For 2017 and then for 2018, compute the amount that Stream should report as income from its investment in Q-Video in its external financial statements under the equity method. (Enter your answers in whole dollars and not in millions. Do not roun d intermediate calculations.)

Explanation / Answer

For 2017

Profit of Q-Video = 370,000

Less: Dividend Paid out = 18,000

Less: Unrealised Profit = 50% X 164,000 - 50% X 100,040 = 31,980

Less: Amortisation of Implicit Goodwill = (720,000 - 298,000)/25 = 16,880

Income Attributable to Stream in 2017 = (370,000 - 18,000 - 31,980 - 16,880)*30% = $90,942

For 2018

Loss = -116,000

Unrealised Profit = 50% X 180,000 - 50% X 144,000 = 18,000

Income Attributable to Stream in 2018 = (-116,000 - 18,000 - 18,000 - 16,880)*30% = $95,136

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