Question: ABC owns a 30% interest in XYZ, giving it representation on the investee's board of directors. At the beginning of the year, the Equity Investment was carried on ABC's balance sheet at $500,000. During the year, XYZ reported net income of $250,000 and paid ABC a dividend of $50,000. In addition, ABC sold inventory to XYZ, recording a gross profit of $20,000 on the sale. At the end of the year, 50% of the merchandise remained unsold by XYZ.
Required:
Q1. Prepare the equity method journal entry to defer the unrealized inventory gross profit.
Q2. How much equity income should Lauralee report from XYZ during the year?
Q3. What is the balance in the Equity Investment at the end of the year?
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