Phast Corporation owns a 80% interest in Stechno Company,acquired several years ago at a cost equal to book value and fair value.Stechno sells merchandise to Phast for the first time in 2011,and some is unsold at December 31,2011.In computing income from the investee for 2011 under the equity method,Phast uses which equation?

Question

Quizplus · Accepted Answer

When using the equity method, the investor recognizes their share of the investee's income based on their percentage of ownership. In this case, Phast owns an 80% interest in Stechno, so they would recognize 80% of Stechno's income.
However, they also need to adjust for any unrealized profit in their ending inventory from purchases made from Stechno. Since Phast owns 100% of their own inventory, they would only need to adjust for their percentage of ownership in Stechno, which is 80%. Therefore, they would subtract 80% of the unrealized profit in their ending inventory from their share of Stechno's income.
Overall, the equation would be: 80% of Stechno's income - 80% of the unrealized profit in Phast's ending inventory. This is reflected in choice C.

Phast Corporation Owns a 80% Interest in Stechno Company,acquired Several