Question

Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of gross profit on intra-entity sales must be deferred by Luffman? Multiple Choice $0. $8,400. $28,000. $52,000. $80,000.

Answer 1

Gross profit on intra-entity sales must be deferred by Luffman = $0

Step-by-step explanation:

When equity method is followed, intra-group transactions are adjusted in cost of investment, and thus profit arising on such transactions is also adjusted to sales.

Further when there is sale of inventory from subsidiary/ associate to holding, then until the time the entire inventory is sold further by the parent company, no profit is recognized.

In the given case Luffman is holding company and Bruce is associate in this case as per equity method, at the year end when entire merchandise is sold then the gross profit proportionate to the share of holding shall be recognized.

In our case entire inventory purchased by Luffman from Bruce Inc. has been sold at year end. Thus it will recognize the gross profit of $8,400 i.e. ($80,000 - $52,000)*30%, In this case no amount gross profit is to be deferred.

Correct option is $0