Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin's intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020. Assume the equity method is used. The following data are available pertaining to Anderson's income and dividends.
Compute the equity in earnings of Anderson reported on Philbin's books for 2020.
A)$63,000.
B)$62,730.
C)$63,270.
D)$70,000.
E)$62,700.

Question

Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin's intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.  Assume the equity method is used. The following data are available pertaining to Anderson's income and dividends.
 Compute the equity in earnings of Anderson reported on Philbin's books for 2020.
A)$63,000. 
B)$62,730. 
C)$63,270. 
D)$70,000. 
E)$62,700.

Quizplus · Accepted Answer

Equity in earnings of Anderson = 90% x (Anderson's income from continuing operations – intercompany profit) + (balance of intercompany profit/loss) 
Anderson's income from continuing operations = $140,000 
Intercompany profit = 25% x Cost of goods sold = 25% x $320,000 = $80,000 
Balance of intercompany profit/loss = $0 (since no information is given about reversal of previous intercompany profits/losses) 
Equity in earnings of Anderson = 90% x ($140,000 - $80,000) + $0 = $62,700 
Therefore, the correct answer is B) $62,730.

Anderson Company, a 90% Owned Subsidiary of Philbin Corporation, Transfers