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: 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

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:  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?

Quizplus · Accepted Answer

$110,000 - $70,000 = $40,000 × ($55,000/$110,000) = $20,000 × 40% = $8,000 Deferred Profit

Acker Inc Bought 40% of Howell Co