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In: Accounting

Jubilee, Inc., owns 20 percent of JPW Company and applies the equity method. During the current...

Jubilee, Inc., owns 20 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $84,700 and then sells it to JPW for $121,000. At the end of the year, JPW still holds only $26,000 of merchandise. What amount of gross profit must Jubilee defer in reporting this investment using the equity method?

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Expert Solution

Working Notes:
CALCULATION OF THE MARGIN RATIO
Particulars Amount
Sales $           1,21,000
Less: Cost of Sales $               84,700
Gross Profit $               36,300
Gross Profit Margin % =
Gross Profit $               36,300
Divide By "/" By
Sales $           1,21,000
Equal to                        0.30
Multiply By "X" By 100
Equal to 30%
It means Jubilee, Inc. earnings is 30% on sales
Solution:
Caclulation of Amount of Gross Profit Which Jubilee Defer in reporting his investment
Ending Inventory JPW Company holds at the end of year = $               26,000
Gross Margin on this inventory = 30% of $ 26,000 = $                 7,800
Share of Jubilee in JPW Company = 20%
Share of profit in ending inventory = ($ 7,800 X 20%)= $                 1,560
Answer = Jubilee can defer in reporting this investment = $ 1,560

ekkarill92 answered 2 years ago
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