Asked by Crystal Weaver on Apr 25, 2024
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Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee's operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021.What amount of gross profit on 2021 intra-entity sales should Steven defer at December 31, 2021?
Gross Profit
The difference between revenue and the cost of goods sold before expenses are subtracted.
Intra-entity Sales
Transactions of goods or services that occur between divisions or subsidiaries within the same parent company, impacting consolidated financial statements.
Equity Income
The earnings derived from an investment in the shares of another company, where the income is recognized in proportion to the ownership percentage.
- Develop journal entries for equity method investments, covering initial recognition, recording of the investee's net income or loss, and received dividends.
- Compute and postpone the recognition of gross profit from transactions involving inventory sales between entities, ensuring its appropriate acknowledgment in future periods.
Verified Answer
KP
Learning Objectives
- Develop journal entries for equity method investments, covering initial recognition, recording of the investee's net income or loss, and received dividends.
- Compute and postpone the recognition of gross profit from transactions involving inventory sales between entities, ensuring its appropriate acknowledgment in future periods.