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Question 15.6: Jones Company owns 25 percent of Jason Company (both fictiti...

Jones Company owns 25 percent of Jason Company (both fictitious companies) and appropriately applies the equity method of accounting. Excess amortization related to undervalued assets at the time of the investment is $8,000 per year. During 2009 Jones sold $96,000 of inventory to Jason for $160,000. Jason resold $120,000 of this inventory during 2009. The remainder was sold in 2010. Jason reports income from
its operations of $800,000 in 2009 and $820,000 in 2010.

1. Calculate the equity income to be reported as a line item on Jones’s 2009 income statement.
2. Calculate the equity income to be reported as a line item on Jones’s 2010 income statement.

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1: Equity Income 2009

(table 1)

2: Equity Income 2010

(table 2)

table 1
Jones’s share of Jason’s reported Income (25% × $800,000) $200,000
Amortization of excess purchase price (8,000)
Unrealized profit (25% × $16,000) \underline{(4,000)}
Equity income 2009 \underline{\underline{\$188,000 } }
Profit margin: 40 percent ($64,000/$160,000)
Inventory on 31 Dec 2009: $40,000 (profit of 40 percent or $16,000)
table 2
Jones’s share of Jason’s reported Income (25% × $820,000) $205,000
Amortization of excess purchase price (8,000)
Realized profit (25% × $16,000) \underline{4,000}
Equity income 2010 \underline{\underline{\$201,000 } }

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