Figure:
Acker Inc. bought 40% of Howell Co. on January 1, 2010 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: $\begin{array}{cccc}
\text { Year } & \begin{array}{c}
\text { Cost to } \
\text { Acker }
\end{array} & \begin{array}{c}
\text { Transfer } \
\text { Price }
\end{array} & \begin{array}{c}
\text { Amount Held by } \
\text { Howell at Year-End }
\end{array} \
2010 & \$ 55,000 & \$ 75,000 & \$ 15,000 \
2011 & \$ 70,000 & \$ 110,000 & \$ 55,000
\end{array}$ Howell reported net income of $100,000 in 2010 and $120,000 in 2011 while paying $40,000 in dividends each year.
-What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2011?

Question

Quizplus · Accepted Answer

The unrealized profit is calculated on the inventory still held by Howell at the end of 2011. The profit per unit is the difference between the transfer price and the cost to Acker. For 2011, the profit is ($110,000 - $70,000) = $40,000. Howell held $55,000 worth of inventory at the end of 2011, which is 50% of the total transferred ($110,000). Therefore, the unrealized profit is 50% of $40,000, which is $20,000. Since Acker owns 40% of Howell, the deferred profit is 40% of $20,000, which is $8,000.

Figure: Acker Inc Howell Reported Net Income of $100,000 in 2010 and $120,000

Figure:
Acker Inc Howell Reported Net Income of $100,000 in 2010 and $120,000