Question

Jubilee, Inc., owns 35 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $60,000 and then sells it to JPW for $75,000. At the end of the year, JPW still holds only $30,000 of merchandise, What amount of gross profit must Jubilee defer in reporting this investment using the equity method

Answer 1

The amount of gross profit which Jubilee must defer in reporting this investment is equal to $2,100.

Step-by-step explanation:

This can be calculated as follows:

Gross profit on sale = Sales - Cost of sales = $75,000 - $60,000 = $15,000

Gross profit margin = Gross profit on sale / Sales = $15,000 / $75,000 = 0.20, or 20%

Gross margin on ending inventory = Ending inventory * Gross profit margin = $30,000 * 20% = $6,000

Share of gross profit of Jubilee, Inc. in ending inventory = Gross margin on ending inventory * Share of Jubilee, Inc. in JPW Company = $6,000 * 35% = $2,100

Therefore, the amount of gross profit which Jubilee must defer in reporting this investment is equal to its share of gross profit in ending inventory which is $2,100.