Panner Inc owns 25 percent of Watkins and applies the equity

Panner, Inc., owns 25 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $91,000 and then sells it to Watkins for $130,000. At the end of the year, Watkins still holds only $22,400 of merchandise. What amount of gross profit must Panner defer in reporting this investment using the equity method? Multiple Choice $10,080. $4,080. $12,480. $1,680

Solution

Answer:-Gross profit = $130000-$91000 =$39000

Gross profit rate =(Gross profit/Sales)*100

=($39000/$130000)*100 =30%

Inventory remaining in the hands of Watkins =$22400

The amount of gross profit must Panner defer in reporting this investment using the equity method =(Inventory remaining at year end*Gross profit rate)*Ownership

=($22400*30%)*25%

=$6720*25%

=$1680 Intra-entity unrealized deferred gain