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"

Answer 1

Deferred profit is zero

Step-by-step explanation:

By selling the inventory Bruce normally records a profit of $28,000($80,000-$52,000).

However, the profit needs to be adjusted at the end of the year to reflect the portion of the inventory that Luffman Inc,is yet to sell to third parties,interestingly, all of the inventory bought have been sold to external parties,which the total profit of $28,000 for Bruce has now been realized.

The rationale behind this is that the intra-entity sales are not sales in actual terms, until the goods bought are sold to non-related parties.