Alex Inc buys 40 percent of Steinbart Company on January 1 2

Alex, Inc., buys 40 percent of Steinbart Company on January 1, 2017, for $530,000. The equity method of accounting is to be used. Steinbart\'s net assets on that date were $1.2 million. Any excess of cost over book value is attributable to a trade name with a 20-year remaining life. Steinbart immediately begins supplying inventory to Alex as follows:

45,000

Inventory held at the end of one year by Alex is sold at the beginning of the next.

Steinbart reports net income of $80,000 in 2017 and $110,000 in 2018 and declares $30,000 in dividends each year. What is the equity income in Steinbart to be reported by Alex in 2018?

Amount Held by Alex at Year-End (at Transfer Price)
2017	$70,000	$100,000	$25,000
2018	96,000	150,000	45,000

Solution

Purchase Cost - Steinbart Company          530,000 Book Value of Steinbart Shares - $1,200,000 X 40%          480,000 Trade Name            50,000 Annual Amortization - Trade Name - $50,000 / 20 Years              2,500 Gross Profit Rate - 2017 = $30,000 / $100,000 = 30% Gross Profit Rate - 2018 = $54,000 / $150,000 = 36% Equity Income in Steinbart - 2018 Income - $110,000 X 40%            44,000 Less: Amortization - Trade Name            (2,500) Recognition of 2017 - Unrealized Gain - $25,000 X 30% X 40%              3,000 Less: Deferreal of 2018 Unrealized Gain - $45,000 X 36% X 40%            (6,480) Equity Income in Steinbart - 2018            38,020