1Power Inc owns 80 of Station Co and applies the equity meth

1)Power Inc. owns 80% of Station Co. and applies the equity method. During the current year, Power bought inventory costing $60,000 and then sold it to Station for $100,000. At year-end, only $24,000 of merchandise was still being held by Station. What amount of intra-entity inventory profit did Power record at the time of the sale?

A. $7,680.
B. $9,600.
C. $0.
D. $32,000.
E. $40,000.

2)On August 8, 2017, Power Corp. sold land to Sewage Co., its wholly owned subsidiary. The land cost $60,000 and was sold to Sewage for $89,000. The land is sold to a third party in 2018. Assume Power use the equity method to account for its investment in Sewage, when should the gain on the sale of the land realized?  

A. Proportionately over a designated period of years.
B. No gain can be recognized.
C. When Sewage Co. sells the land to a third party.
D. As Sewage uses the land.
E. When Sewage Co. begins using the land productively.

3)Power Inc. owns 80% of Station Co. and applies the equity method. During the current year, Power bought inventory costing $60,000 and then sold it to Station for $100,000. At year-end, only $24,000 of merchandise was still being held by Station. What amount of intra-entity inventory profit must be deferred by Power at year-end? (Hint: For an intra-entity transaction, in the year when the inter-entity transferred merchandise is not sold to a third-party or is not consumed then the parent company will defer the unearned gross profit. This question is about a downstream sale from the parent company Power to its subsidiary Station. In a downstream sale, ALL unearned gross profit must be deferred by the parent company at this year-end.)
A. $7,680.
B. $9,600.
C. $0.
D. $32,000.
E. $40,000.

Solution

1) At the time of sale to Station Co. by Power Inc., the total profit recorded by Power Inc. is $40,000 (Sale price - Cost of Inventory = $100,000-$60,000). As Power Inc. holds 80% of Station Co.and applies the equity method, the intra entiry inventory profit will be 80% of total profit recorded by Power Inc. (i.e. 80% of $40,000 = $32,000). Therefore the correct answer will be option D)$32,000.

2) The gain on sale will be realized when Sewage Co. sells the land to a third party because Sewage Co. is the wholly owned subsidiary of Power Corp. and sale of land by Power Corp. to Sewage Co. is an intra entity transaction and actual gain can be realized only when land is sold to third party by Sewage Co. Therefore the correct option is C) When Sewage Co. sells the land to a third party.

3) Calculation of amount of intra entity profit deferred by Power at year end

Total Profit recorded on sale = $100,000-$60,000 = $40,000

Intra entity profit = $40,000*80% = $32,000

Inventory held at year end = $24,000

Gross Profit Rate = (Total profit/Sale Price)*100 = ($40,000/$100,000)*100 = 40%

Intra entity profit deferred by Power at year end = $24,000*40%*80% = $7,680

Therefore the correct option is A)$7,680