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Advanced Accounting Ch 1 Q 3

Aaron, Inc., sold $120,000 in inventory to Hank Company during Year 10 for $200,000. Hank resold $85,000 of this merchandise in Year 10 with the remainder to be disposed of during Year 11. Assuming that Aaron owns 30 percent of Hank and applies the equity method, what journal entry is recorded at the end of Year 10 to defer the intra-entity gross profit?


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Answer #1

Step 1:  Find Gross Profit %

Sales - Cost of Goods Sold = Gross Profit #

Gross Profit # / Sales = Gross Profit %


200,000 - 120,000 = 80,000

80,000 / 200,000 = 40% Gross profit


Step 2: Determine the ending inventory.

200,000 sales - 85,000 resold merchandise = 115,000 ending inventory


Step 3: Find deferred gross profit.

Deferred Gross profit = ending inventory x gross profit % x ownership %

115,000 ending inventory x 40% gross profit x 30% ownership = 13,800 deferred gross profit


Step 4 Prepare Journal Entry for deferred gross profit.



Dec 31, Year 11


Equity of Earnings 

of Affiliate

13,800

            Investment in

             Hank Co

                 13,800






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