Question

View nsert Design Layout References Mailings Calibri (Body) - 12 . A- A A A BIU.abe X, XA..AA Review A E . . A + 1 Tolson Corp owns 405 of the voting common shares of Ramos Corp and has significant influence. In 2010, Tolson buys inventory costing $100,000 from third parties and then sells it to Ramos for 150,000. At the end of 2010, Ramos still has $60,000 inventory on hand. What amount of unrealized gross profit must Tolson defer in 2010. Show the required entry and amounts. Dr.$. Cr$ Assume the same facts as in Part A. Assume that the 60.000 ending inventory is sold by Ramos by the end of 2011. Also assume that in 2011, Tolson purchases an additional $80,000 in inventory from third parties and sells it to Ramos for $100,000. At the end of 2011, $400,000 of this inventory is unsold. In 2011, Tolson earns $500,000 and pays dividends of $400,000. Ramos earns $200,000 and pays dividends of $80,000. What is the amount of equity income recorded by Telson in 2011? 54 words UK English (United States) How Search works Python Launcher

Answer 1

Assuming Tolson Corp holds 40% (assuming "405" to be a typo) in Ramos Corp and in Part-B of the question inventory unsold is $40,000 (assuming "$400,000" to be a typo) the given example is solved.

(A) Intra-entity gains from sales are initially deferred under the equity method and then recognized as income at the time of the inventory’s eventual disposal.

1. Gross Profit earned by Tolson Corp = $50,000/$150,000 = 33.33% on Sales

2. Amount of Unrealized Profit in Ramos Corp's Inventory = $60,000 * 33.33% = $20,000

3. Amount of Unrealized Profit to be deferred in 2010 = $20,000 * 40% = $8,000

Equity in Investee Income Dr. $8,000

Investment in Ramos Corp Cr. $8,000

(B)

1. Gross Profit earned by Tolson Corp = $20,000/$100,000	20%	on Sales
2. Amount of Unrealized Profit in Ramos Corp's Inventory = $40,000 * 20%	$8000
3. Amount of Unrealized Profit to be deferred in 2011 = $8,000 * 40%	$3200

Equity Income Accrual ($200,000*40%)	$80,000
Less: Dividend Income ($80,000*40%)	$32,000
	$48,000
Add: Deferred Unrealized gain of previous year	$8,000
Less: Deferred Unrealized gain of current year	$3,200
Equity Income to be recorded	$52,800