On January 1, 2021, Daniel Corp. acquired 80% of the voting common stock of Phillips Inc. During the year, Daniel sold to Phillips for $315,000 goods that cost $210,000. At year-end, Phillips owned 30% of the goods transferred. Phillips reported net income of $305,000, and Daniel's net income was $986,000. Daniel decided to use the equity method to account for this investment. What amount of intra-entity gross profit would be deferred in 2021?
A) $21,000.
B) $25,200.
C) $31,500.
D) $84,000.
E) $105,000.

Question

Quizplus · Accepted Answer

The intra-entity gross profit to be deferred is calculated as the gross profit percentage on the unsold inventory. The gross profit is $315,000 - $210,000 = $105,000. Since 30% of the goods remain unsold, the deferred gross profit is 30% of $105,000, which is $31,500.