Acker Inc. bought 40% of Howell Co. on January 1, 2020 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:

Year Cost to Acker Transfer Price Amount Held by Howell at Year-End
2020 $55,000 $75,000 $15,000
2021 $70,000 $110,000 $55,000

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, 2010?

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andromache andromache · Answer 1 · 2021-02-20T03:12:09+01:00

Answer:

the amount of unrealized intra-entity inventory profit is $1,600

Explanation:

The computation of the amount of unrealized intra-entity inventory profit is given below:

= Profit percentage × amount at year end × purchase percentage

= (($75,000 - $55,000) ÷ $75,000) × 15,000 × 40%

= $1,600

hence, the amount of unrealized intra-entity inventory profit is $1,600

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