On January 1, 2020, Stream Company acquired 30 percent of the outstanding voting shares of Q-Video, Inc., for $770,000. Q-Video manufactures specialty cables for computer monitors. On that date, Q-Video reported assets and liabilities with book values of $1.9 million and $700,000, respectively. A customer list compiled by Q-Video had an appraised value of $300,000, although it was not recorded on its books. The expected remaining life of the customer list was five years with straight-line amortization deemed appropriate. Any remaining excess cost was not identifiable with any particular asset and thus was considered goodwill. Q-Video generated net income of $250,000 in 2020 and a net loss of $100,000 in 2021. In each of these two years, Q-Video declared and paid a cash dividend of $15,000 to its stockholders. During 2020, Q-Video sold inventory that had an original cost of $100,000 to Stream for $160,000. Of this balance, $80,000 was resold to outsiders during 2020, and the remainder was sold during 2021. In 2021, Q-Video sold inventory to Stream for $175,000. This inventory had cost only $140,000. Stream resold $100,000 of the inventory during 2021 and the rest during 2022. For 2020 and then for 2021, compute the amount that Stream should report as income from its investment in Q-Video in its external financial statements under the equity method. (Enter your answers in whole dollars and not in millions. Do not round intermediate calculations.)

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Answer:

Stream Company

The amount that Stream Company should report as income from its investment in Q-Video in its external financial statements under the equity method:

2020 = $75,000

2021 = ($30,000)

Explanation:

a) Data and Calculations:

Equity share in Q-Video, Inc. = 30%

Cost of equity investment = $770,000

Q-Video Profits and dividends     Stream's share                

2020 net income = $250,000     $75,000 ($250,000 * 30%)

2021 net loss of $100,000          ($30,000) ($100,000 * 30%)

2020 dividends = $15,000             $4,500 ($15,000 * 30%)

2021 dividends = $15,000              $4,500 ($15,000 * 30%)

b)The equity method is used by Stream Company because its investment in Q-Video, Inc. is less than 51% and more than 20%.  Under the equity method, Stream accounts for its share of net income and net loss.  The investment is initially recorded at cost.  Adjustments are then made to the cost balance at the end of every period by increasing it with the share of net income and decreasing it with its share of net loss and dividends received.

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