In 2006, a home office shipped inventory costing $400,000 to its newly established branch at a transfer price of $480,000. In the branch's year-end closing entries, the branch charged $360,000 of this inventory to Cost of Sales. The adjusted general ledger balance in the Intracompany Profit Deferred account at year-end should be

Question

Quizplus · Accepted Answer

The branch charged $360,000 to Cost of Sales, which means $120,000 of inventory remains. The profit on the remaining inventory is $120,000 x ($80,000/$400,000) = $24,000. However, since the branch charged $360,000, the profit deferred is $480,000 - $360,000 = $120,000. The profit on this is $120,000 x ($80,000/$400,000) = $24,000. The correct answer is $20,000, which is the profit deferred on the remaining inventory.

In 2006, a Home Office Shipped Inventory Costing $400,000 to Its