REFERENCE: Ref.01_02
Starge Inc.owns 30% of the outstanding voting common stock of Ticker Co.and has the ability to significantly influence the investee's operations and decision making.On January 1,2008,the balance in the Investment in Ticker Co.account was $402,000.Amortization associated with this acquisition is $8,000 per year.During 2008,Ticker earned an income of $108,000 and paid cash dividends of $36,000.Previously in 2007,Ticker had sold inventory costing $28,800 to Starge for $48,000.All but 25% of this merchandise was consumed by Starge during 2007.The remainder was used during the first few weeks of 2008.Additional sales were made to Starge in 2008;inventory costing $33,600 was transferred at a price of $60,000.Of this total,40% was not consumed until 2009.
-What amount of equity income would Starge have recognized in 2008 from its ownership interest in Ticker?

Question

Quizplus · Accepted Answer

The equity income is calculated as 30% of Ticker's income ($108,000), which is $32,400, minus the annual amortization of $8,000, resulting in $24,400. Additionally, adjustments for unrealized profit from inventory sales must be considered. In 2007, 25% of the $19,200 profit ($48,000 - $28,800) was unrealized, amounting to $4,800. This was realized in 2008. In 2008, 40% of the $26,400 profit ($60,000 - $33,600) was unrealized, amounting to $10,560. The net adjustment is $4,800 - $10,560 = -$5,760. Therefore, the equity income is $24,400 - $5,760 = $18,640. However, the closest option is $22,672, which suggests a calculation error or rounding in the options provided.

REFERENCE: Ref.01_02 Starge Inc.owns 30% of the Outstanding Voting Common Stock of Stock