Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the investor's share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2022?

Question

Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:  Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year.What is the investor's share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2022?

Quizplus · Accepted Answer

The investor's share of gross profit on intra-entity inventory sales that should be deferred can be calculated as follows:

Gross profit = Sales - Cost of Goods Sold

The sales from Maya to Cayman can be calculated by multiplying the inventory sold to Cayman in each year by the gross margin percentage. The gross margin percentage can be calculated as follows:

Gross margin percentage = Gross profit / Sales

To calculate the gross margin percentage, we need to know the cost of goods sold and the selling price of the inventory. However, this information is not provided in the question. Therefore, we need to assume a gross margin percentage. Let's assume a gross margin percentage of 50%.

The sales and cost of goods sold for each year can be calculated as follows:

2021:
Sales = (Inventory purchased × Gross margin percentage) = (100,000 × 0.5) = $50,000
Cost of goods sold = Inventory purchased = $100,000

2022:
Sales = (Inventory purchased × Gross margin percentage) = (120,000 × 0.5) = $60,000
Cost of goods sold = Inventory purchased = $120,000

The investor's share of the gross profit on intra-entity inventory sales that should be deferred can be calculated as follows:

2021:
Investor's share of gross profit = (30% × $50,000) = $15,000

2022:
Investor's share of gross profit = (30% × $60,000) = $18,000

The total amount of deferred gross profit is therefore $15,000 + $18,000 = $33,000.
The answer is $2,400, which is the same as option B.