Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee's operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022.What amount of equity income would Borgin have recognized in 2021 from its ownership interest in Burkes?

Question

Quizplus · Accepted Answer

Borgin recognizes equity income by taking 30% of Burkes' income ($108,000 * 30% = $32,400), subtracting the annual amortization ($8,000), and adjusting for the deferred gross profit from the inventory sales. The deferred gross profit from 2020 is $4,800 (25% of $19,200), which is recognized in 2021. The deferred gross profit for 2021 is $3,840 (40% of $26,400), which is deferred to 2022. Therefore, the equity income is $32,400 - $8,000 + $4,800 - $3,840 = $25,360. However, the correct choice is $22,672, indicating a possible error in the calculation or options provided.