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, 2013?

Question

Quizplus · Accepted Answer

The unrealized intra-entity inventory profit to be deferred is calculated based on the inventory still held by Howell at the end of 2013. The profit on the inventory is the difference between the transfer price and the cost to Acker. For 2013, the profit is $110,000 - $70,000 = $40,000. Howell holds $55,000 worth of inventory at year-end, which is 50% of the total transferred inventory ($110,000). Therefore, the unrealized profit is 50% of $40,000, which is $20,000. Acker owns 40% of Howell, so the deferred profit is 40% of $20,000, which is $8,000.

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