Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equi
ID: 2612784 • Letter: C
Question
Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:
Cost to
Transfer
Amount Held by
Year
Maya
Price
Cayman at Year-End
2013
$30,000
$45,000
$ 9,000
2014
$48,000
$80,000
$20,000
Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year.
What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2013?
A) $ 900.
B) $3,000.
C) $4,500.
D) $6,000.
E) $9,000.
What is the amount of unrealized inventory profit to be deferred on December 31, 2014?
A) $1,500.
B) $2,400.
C) $3,600.
D) $4,000.
E) $8,000.
Cost to
Transfer
Amount Held by
Year
Maya
Price
Cayman at Year-End
2013
$30,000
$45,000
$ 9,000
2014
$48,000
$80,000
$20,000
Explanation / Answer
In the equity method, the investor company reports the income earned on the investment in an investee cpompany on its income statement based on the investor company's share of the investee company's assets. Thus, in the above question, Cayman Inc. is the investor company and holds 30% of Maya Company. That means, if income of Maya Comapny is $100,000, Cayman will report income of 100000 * 30% = $30000 on its income statement on account of its investment is Maya.
1) 2013 - Maya reports an income of $100,000. This also includes profit that it generated by selling/transferring goods to Cayman. This profit is 45000 - 30000 = $15,000. Out of this, 30% belongs to Maya whic is 30% of 15000 = $4500
However, out of $45,000, $9000 worth of goods are still in Cayman's inventory, that is 9000/45000 or 20% of the profit is unconfirmed. Hence, this proportion of profit has to be deferred.
Hence, the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2013 = 4,500 * 0.2 = $900
2) - 2014, SImilarly, $120,000 income of Maya includes the profit on selling/transferring of goods to Cayman worth = 80000-48000 = $32,000.
Out of this, 30% belongs to Maya whic is 30% of 32000 = $9600
However, outh of $80,000, $20,000 worth of goods are still in Cayman's inventory, that is 20000/80000 or 25% of the profit is unconfirmed. Hence, this proportion of profit has to be deferred.
Hence, the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2014 = 9,600 * 0.25 = $2,400
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