Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropri

Question

Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2018, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2018, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2018, Jager still held some of this inventory at its intra-entity selling price of $50,000. Required: Determine the amount of Equity in Investee Income that Jager should have reported for 2018.

Explanation / Answer

Equity in investee income: Equity income accrual ($100,000 × 30%) $30,000 Deferral of share of intra-entity gross profit (below) ($5,250) Amortization (given) ($11,000) Equity in investee income $13,750 Deferral of its share of intra-entity gross profit: Remaining inventory-end of year $50,000 Gross profit percentage ($33,600 ÷ $96,000) × 35% Profit within remaining inventory $17,500 Ownership percentage × 30% Share of intra-entity gross profit $5,250

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