Reference no: EM133111427

Question - Assume that on January 1, 2019, a Reporting Company acquires a 35 percent interest in a Legal Entity for $294,000 cash. The fair value of the 65 percent interest not acquired by the Reporting Company is $546,000. The fair value and book value of the identifiable net assets of the Legal entity equals $840,000. The Reporting Company has a right to 35 percent of the reported income (loss) of the Legal Entity. The Legal Entity is determined to be a VIE, and the Reporting Company is determined to be primary beneficiary. For the year ended December 31, 2019, the Reporting Company and the VIE reported the following pre-consolidation income statements assuming that the Reporting Company applies the equity method:

Assume that the Legal Entity's income statement for the year ended December 31, 2019 includes sales to the Reporting Company, and $126,000 of these sales are still in Reporting Company's ending inventory. On intercompany sales, the Legal Entity earns a gross profit equal to 40 percent of sales price. Assume that all of these intercompany items are in the ending inventory of the Reporting Company on December 31, 2019.

Required - Show how the Equity method income (loss) from VIE is computed.