Question

Flax Co. acquired 80% of the voting common stock of Levinson Corporation on January 1, 2021. During the year, Flax made sales of inventory to Levinson. The inventory cost Flax $275,000 and was sold to Levinson for $420,000. Levinson held $84,000 of the goods in its inventory at the end of the year. The amount of intra-entity gross profit for which recognition is deferred, and should therefore be eliminated in the consolidation process at the end of 2021, is:

a. $28,600
b. $39,200
c. $32,800
d. $46,400

Answer 1

The amount of intra-entity gross profit for which recognition is deferred and should be eliminated in the consolidation process is $29,000.

Step-by-step explanation:

To calculate the amount of intra-entity gross profit for which recognition is deferred and should be eliminated in the consolidation process, we need to determine the profit on the intercompany sale of inventory. Flax Co. sold inventory to Levinson Corporation for $420,000, which had cost Flax $275,000. Therefore, the gross profit on this sale is $420,000 - $275,000 = $145,000.

However, since Flax has a controlling interest in Levinson (80% ownership), 20% of this profit needs to be eliminated as it represents profit earned from transactions between the two companies. So, the amount of intra-entity gross profit for which recognition is deferred and should be eliminated is 20% of $145,000, which is $29,000.