Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: $\begin{array}{llll}& \text { Cost to } & \text { Transfer } & \text { Amount Held by } \
\text { Year } & \text { Acker } & \text { Price } & \text { Howell at Year-End }\\hline
2012 & \mathbf{\$} 55,000 & \$ 75,000 & \$ 15,000 \
2013 & \$ 70,000 & \$ 110,000 & \$ 55,000
\end{array}$ Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2012?

Question

Quizplus · Accepted Answer

The unrealized intra-entity inventory profit is the difference between the transfer price and the cost of the inventory to the seller. In this case, the transfer price is $75,000 and the cost to Acker is $55,000, so the unrealized intra-entity inventory profit is $20,000. However, only 40% of this profit is recognized by Acker, so the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2012 is $20,000 x 40% = $8,000.

Acker Inc Bought 40% of Howell Co Howell Reported Net Income of $100,000 in 2012 and $120,000