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 2014,and some is unsold at December 31,2014.In computing income from the investee for 2014 under the equity method,Phast uses which equation?

Question

Quizplus · Accepted Answer

When computing income from an investee under the equity method, the investor includes its share of the investee's income, adjusted for any unrealized profit on intercompany transactions. In this case, Phast owns an 80% interest in Stechno and should therefore include 80% of Stechno's income in its own income statement. Additionally, since some of the merchandise sold by Stechno to Phast is still unsold at the end of the period, Phast needs to adjust for any unrealized profit on that inventory. However, since Phast owns 80% of Stechno and is only dealing with intercompany transactions, it only needs to adjust for 80% of the unrealized profit. Therefore, the correct equation is 80% of Stechno's income less 80% of the unrealized profit in Phast's ending inventory, which is choice C.

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