Panner, inc., owns 30 percent of watkins and applies the equity method. During the current year, panner buys inventory costing $93,100 and then sells it to watkins for $133,000. At the end of the year, watkins still holds only $21,400 of merchandise. What amount of gross profit must panner defer in reporting this investment using the equity method?

Company P should defer $1,926 of unrealized profit in reporting the investment using equity method.

Explanation:

Gross Profit Percentage = Revenue - Cost of goods sold / Revenue

Gross Profit Percentage = $133,000 - $93,100 / $133,000

Gross Profit Percentage = 0.3

Gross Profit Percentage = 30

Unrealized Intra-entity Gross profit = (Remaining ending inventory * Gross profit percentage) * Investor's ownership percentage

Unrealized Intra-entity Gross profit = ($21,400 * 30%) * 30%

Unrealized Intra-entity Gross profit = $6,420 * 30%

Unrealized Intra-entity Gross profit = $1,926

Company P should defer $1,926 of unrealized profit in reporting the investment using equity method.

a corporation is legally separate from its owner, and it pays its own taxes.

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