Question

kane inc. owns 30% of woodhouse co. and applies the equity method. during the current year, kane bought inventory costing $71,500 and then sold it to woodhouse for $130,000. at year-end, only $30,000 of merchandise was still being held by woodhouse. what amount of intra-entity gross profit must be deferred by kane?

Answer 1

If kane inc. owns 30% of woodhouse co. and applies the equity method. during the current year, kane bought inventory costing $71,500 and then sold it to woodhouse for $130,000. The  amount of intra-entity gross profit that must be deferred by kane is: $4,050.

Intra-entity gross profit

Using this formula

Intra-entity gross profit=Merchandise×[(Selling price-Cost of inventory)/Selling price]×Rate

Intra-entity gross profit=30,000×[(130,000-71,500)/130,000]×.30

Intra-entity gross profit=30,000×0.45×0.30

Intra-entity gross profit=$4,050

Therefore If kane inc. owns 30% of woodhouse co. and applies the equity method. during the current year, kane bought inventory costing $71,500 and then sold it to woodhouse for $130,000. The  amount of intra-entity gross profit that must be deferred by kane is: $4,050.

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