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 1 year ago

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