REFERENCE: Ref.01_14
Acker Inc.bought 40% of Howell Co.on January 1,2008 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
Howell reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year.
-What is the Equity in Howell Income that should be reported by Acker in 2009?

Question

REFERENCE: Ref.01_14
Acker Inc.bought 40% of Howell Co.on January 1,2008 for $576,000.The equity method of accounting was used.The book value and fair value of the net assets of Howell on that date were $1,440,000.Acker began supplying inventory to Howell as follows:
  Howell reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year.
-What is the Equity in Howell Income that should be reported by Acker in 2009?

Quizplus · Accepted Answer

To calculate equity in Howell income, we need to use the equity method of accounting. 
In 2008, equity in Howell income would be calculated as 40% of Howell's net income ($100,000 × 40% = $40,000) since no amortization or adjustment is needed in the first year of acquisition. 
In 2009, the equity in Howell income would be calculated as follows: 
Beginning investment balance = $40,000 (net income in 2008)
Add: 40% of Howell's net income for 2009 ($120,000 × 40% = $48,000)
Subtract: 40% of dividends paid by Howell in 2009 ($40,000 × 40% = $16,000)
Equity in Howell income for 2009 = $40,000 + $48,000 - $16,000 = $72,000 
Therefore, the equity in Howell income that should be reported by Acker in 2009 is $41,600 ($72,000 × 40%). Option B is the correct answer.

REFERENCE: Ref.01_14 Acker Inc.bought 40% of Howell Co.on January 1,2008 for $576,000.The