Question

Lewis Inc. owns 40% of Morgan and applies the equity method. During the current year, Lewis buys inventory costing $400,000 and sells it to Morgan for $700,000. At the end of the year, Morgan still holds $140,000 of this merchandise. What amount of unrealized gross profit must Lewis defer in reporting this investment using the equity method?

A. $24,000
B. $56,000
C. $60,000
D. $140,000

Answer 1

Answer:

The correct answer is a) $24,000

Explanation:

At the end of the year, Morgan still holds $140,000 of this merchandise

Lewis Inc. owns 40% of Morgan and applies the equity method

40% = 0.4

$140,000 x 40% = $56,000

Lewis buys inventory costing $400,000 and sells it to Morgan for $700,000.

$700,000 - $400,000 = $300,000

=$56,000 x ($300,000 ÷ $700,000)

=$56,000 x 0,428571429

= $24,000