Question

Panner, Inc., owns 30 percent of Watkins and applies the equity method. During the current year, Panner buys inventory costing $126,000 and then sells it to Watkins for $180,000. At the end of the year, Watkins still holds only $26,400 of merchandise. What amount of gross profit must Panner defer in reporting this investment using the equity method

Answer 1

The gross profit that will be deferred is $2376

Step-by-step explanation:

The cost of inventory = $126000

Selling price of inventory (revenue) = $180000

The remaining inventory with Watkins = $26400

Gross profit percentage = (revenue – cost) / revenue

Gross profit percentage = (180000 – 126000) / 180000 = 0.3 or 30%

Remaining value = $26400 × 30% = 7920

Ownership = 7920 × 30% = $2376

The gross profit that will be deferred is $2376