Steven Company Owns 40% of the Outstanding Voting Common Stock

question 7

Essay

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2011, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2011, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2010, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2010. Additional sales were made to Steven in 2011 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2011 purchases had not been sold to outsiders by the end of 2011.
-What amount of equity income would Steven have recognized in 2011 from its ownership interest in Nicole?

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Definitions:

Qualifying Expenses

Expenses that meet the criteria set by tax laws or other regulations for deductible or otherwise favorable treatment.

Child and Dependent Care Credit

A tax credit offered to taxpayers to offset the cost of care for qualifying dependents, enabling the taxpayer to work or look for work.

Qualified Day Care Center

A child care facility that meets specific criteria set by tax law, potentially eligible for certain tax benefits.

American Opportunity Tax

An educational credit for sanctioned expenses related to an eligible student’s initial four years at a higher education institution.