BuyCo, Inc. holds 25 percent of the outstanding shares of Marqueen Company and appropriately applies the equity method of accounting. Excess cost amortization (related to a patent) associated with this investment amounts to $10,000 per year. For 2017, Marqueen reported earnings of $100,000 and declares cash dividends of $30,000. During that year, Marqueen acquired inventory for $50,000, which it then sold to BuyCo for $80,000. At the end of 2017, BuyCo continued to hold merchandise with a transfer price of $32,000.
a. What Equity in Investee Income should BuyCo report for 2017?
b. How will the intra-entity transfer affect BuyCo’s reporting in 2018?
c. If BuyCo had sold the inventory to Marqueen, how would the answers to (a) and (b) have changed?
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