Question

Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2018. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario held $60,000 of the goods in its inventory at the end of the year. The amount of intra-entity gross profit for which recognition is deferred, and should therefore be eliminated in the consolidation process at the end of 2018, is:
A. $15,000.
B. $20,000.
C. $32,500.
D. $30,000.
E. $110,000.

Answer 1

Answer: B.) $20,000

Explanation:

Given the following :

Yukon inventory cost = $260,000

Amount sold to Ontario = $390,000

Amount held by Ontario = $60,000

(Amount held by Ontario ÷ Amount sold to Ontario) × (Amount sold to Ontario - Yukon Inventory Cost)

(60,000/390,000) × (390,000 - 260,000) (0.15385) × ($130,000)

= $20,000

Therefore, The amount of intra-entity gross profit for which recognition is deferred, and should therefore be eliminated in the consolidation process at the end of 2018 is $20,000