Parrot Corporation holds a 42 percent ownership of Sunrise, Inc. The equity method is being applied. Parrot assigned the entire original excess purchase price over book value to goodwill. During 2012, the two companies made intra-entity inventory transfers. A portion of this mer- chandise was not resold until 2013. During 2013, additional transfers were made.

 How should Parrot compute the amount of equity income to be recognized in 2012? What entry is made to record this income

Solution

Equity income will be = Share in net income of sunrise 2012 – profit on downward transacted unsold inventory – Share in profit on upward transacted …………………………………………………..

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