Cayman Inc. bought 30% of Maya Company on January 1, 2013 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: $\begin{array}{llll}& \text { Cost to } & \text { Transfer } & \text { Amount Held by } \
\text { Year } & \text { Maya } & \text { Price } & \text { Cayman at Year-End }\\hline
2013 & \$ 30,000 & \$ 45,000 & \$ 9,000 \
2014 & \$ 48,000 & \$ 80,000 & \$ 20,000
\end{array}$ Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the amount of unrealized inventory profit to be deferred on December 31, 2014?

Question

Quizplus · Accepted Answer

The unrealized profit is calculated on the inventory held by Cayman at year-end. In 2014, the profit on the inventory is $80,000 - $48,000 = $32,000. The portion of this profit that is unrealized is based on the percentage of inventory still held, which is $20,000/$80,000 = 25%. Thus, the unrealized profit is $32,000 * 25% = $8,000. Since Cayman owns 30% of Maya, the deferred unrealized profit is $8,000 * 30% = $2,400.

Cayman Inc Maya Reported Net Income of $100,000 in 2013 and $120,000