4)Power Inc. owns 80% of Station Co. and applies the equity method. During the c

Question

4)Power Inc. owns 80% of Station Co. and applies the equity method. During the current year, Power bought inventory costing $60,000 and then sold it to Station for $100,000. At year-end, only $24,000 of merchandise was still being held by Station. What entries should Power use to record the amount of intra-entity inventory profit deferred at year-end? (Hint: For an intra-entity transaction, in the year when the inter-entity transferred merchandise is not sold to a third-party or is not consumed then the parent company will defer the unearned gross profit. This question is about a downstream sale from the parent company Power to its subsidiary Station. In a downstream sale, ALL unearned gross profit must be deferred by the parent company at this year-end.)
A. Dr. Equity in Station’s net income.
B. Cr. Equity in Station’s net income.
C. Dr. Gross Profit.
D. Dr. Cost of Goods Sold.
E. Cr. Cost of Goods Sold.

Explanation / Answer

Margin of Power in the inventory sold to station = (100000 - 60000) / 100000 = 40%

Inventory sold by Power under ending inventory of Station = $24000

ownership of Power = 80%

Calculation of unrealised in the closing inventory = Inventory held *  Margin booked by Power * ownership of Power = 24000 * 40% * 80% = $7680

Journal Entry:

Debit Equity in station's net income $7680

Credit Cost of Goods Sold $7680

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