Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2010. Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends. Compute the equity in earnings of Gargiulo reported on Posito's books for 2010.
A) $63,000.
B) $62,730.
C) $63,270.
D) $70,000.
E) $62,700.

Question

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2010.  Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.  Compute the equity in earnings of Gargiulo reported on Posito's books for 2010.
A) $63,000. 
B) $62,730. 
C) $63,270. 
D) $70,000. 
E) $62,700.

Quizplus · Accepted Answer

Equity in earnings of Gargiulo = (Gargiulo's net income - Adjustment for intra-entity profit) x Posito's ownership percentage
= ($105,000 - ($40,000 x 0.25)) x 90%
= $62,730

Gargiulo Company, a 90% Owned Subsidiary of Posito Corporation, Sells