Question

Tara Company owns 30% of Hawkins, Inc. and applies the equity method. During the current year, Hawkins buys inventory costing $400,000 and sells it to Tara for $500,000. At the end of the year, only 25% of this merchandise is still being held by Tara. What amount of unrealized gain must be deferred by Hawkins in reporting on the equity method?$937.50$30,000.00$25,000.00$7,500.00$100,000.00

Answer 1

The correct option is d. $7,500

Step-by-step explanation:

For computing the unrealized gain, first we have to compute the gross profit ratio which is shown below:

Since gross profit is not given in the question, so, first we have to find it.

The gross profit formula is shown below:

= Sales revenue - cost of goods sold

= $500,000 - $400,000

= $100,000

Now, gross profit ratio equals to

= (Gross profit ÷ sales revenue) × 100

= ($100,000 ÷ $500,000) × 100

= 20%

In the question, the 25% of merchandise is still held by Tara.

Since merchandise inventory is not given

So, we multiply the gross profit by 25% and 30%

In mathematically,

= Gross profit × 25% × 30%

= $100,000 × 25% × 30%

= $7,500

Hence, the $7,500 amount of unrealized gain must be deferred by Hawkins in reporting on the equity method

Therefore, the correct option is d. $7,500