Charleston Inc. acquired 75% of Savannah Manufacturing on January 4, 2020. During 2020, Charleston sold Savannah $460,000 of goods, which had cost $380,000. Savannah still owned 20% of the goods at the end of the year. In 2021, Charleston sold goods with a cost of $520,000 to Savannah for $700,000, and Savannah still owned 15% of the goods at year-end. What amount of intra-entity gross profit should be recognized through the consolidation process in 2021?
A) $27,000.
B) $20,250.
C) $16,000.
D) $12,000.
E) $0.

Question

Quizplus · Accepted Answer

The intra-entity gross profit to be recognized in 2021 is calculated based on the unsold inventory at year-end. The gross profit percentage for 2021 is ($700,000 - $520,000) / $700,000 = 25.71%. Savannah still owns 15% of the goods, so the intra-entity gross profit is 15% of $700,000 * 25.71% = $16,000.