4Power Inc owns 80 of Station Co and applies the equity meth

4)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 entries should Power use to record the amount of intra-entity inventory profit deferred 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. Dr. Equity in Station’s net income.
B. Cr. Equity in Station’s net income.
C. Dr. Gross Profit.
D. Dr. Cost of Goods Sold.
E. Cr. Cost of Goods Sold.

Solution

Margin of Power in the inventory sold to station = (100000 - 60000) / 100000 = 40%

Inventory sold by Power under ending inventory of Station = $24000

ownership of Power = 80%

Calculation of unrealised in the closing inventory = Inventory held *  Margin booked by Power * ownership of Power = 24000 * 40% * 80% = $7680

Journal Entry:

Debit Equity in station\'s net income $7680

Credit Cost of Goods Sold $7680