P Company purchased a 90% interest in S Company on January 2, 2013. It accounts

Question

P Company purchased a 90% interest in S Company on January 2, 2013. It accounts for its investment in S Company using the cost method. P Company bought S Company because S Company was its primary supplier of merchandise for resale. During 2011, P Company bought merchandise from S Company. The selling price to P Company was $300,000. S Company uses a 25% markup on cost. At the end of 2013, P Company still had in its books 25 percent of the inventory purchased from S Company. In 2014, the intercompany sales totaled $280,000 with 20 percent left in inventory at the end of the year. What is the unrealized profit in ending inventory at the end of 2013?

Please provide detailed steps for solution and answer:

Explanation / Answer

Solution:-

In 2013:-

unrealised profit:-

SP = 300000

Markup 25% on cost means 20% on SP

Markup = 60000

25% stock in inventory

Unrealised profit = 60000*25% = 15000

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