Question

Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity inventory profit must be deferred by Tower?

A. $6,480.

B. $3,240.

C. $10,800.

D. $16,200.

E. $6,610

Answer 1

Option B $3240

Step-by-step explanation:

The reason is that the gross profit on the sale is $54,000 ($120,000 - $66,000). This gross profit margin is 45%.

The ownership share of the inventory that is in stock of the subsidiary would be 30% and out of this 30%, the 45% profit of profit which is $3240 ($24,000 * 30% Ownership of stock * 45% Gross Profit Margin), must not be recognized in the income statement and balance sheet.