Problem
An investor owns 30% of an investee, and accounts for its investment using the equity method. At the beginning of the year, the Equity Investment was reported on the investor's balance sheet at $750,000. During the year, the investee reported net income of $300,000 and paid dividends of $63,000. In addi- tion, the investor sold inventory to the investee, realizing a gross profit of $90,000 on the sale. At the end of the year, 40% of the inventory remained unsold by the investee.
1) Provide the equity method journal entries required for the year.
2) What is the balance of the Equity Investment at the end of the year?
3) Assume the inventories are all sold in the following year, that the investee reports $337,500 of net income. How much equity income will the investor report for the following year?