Jubilee, Inc., owns 35 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $60,000 and then sells it to JPW for $75,000. At the end of the year, JPW still holds only $30,000 of merchandise, What amount of gross profit must Jubilee defer in reporting this investment using the equity method

The amount of gross profit which Jubilee must defer in reporting this investment is equal to $2,100.

Explanation:

This can be calculated as follows:

Gross profit on sale = Sales - Cost of sales = $75,000 - $60,000 = $15,000

Gross profit margin = Gross profit on sale / Sales = $15,000 / $75,000 = 0.20, or 20%

Gross margin on ending inventory = Ending inventory * Gross profit margin = $30,000 * 20% = $6,000

Share of gross profit of Jubilee, Inc. in ending inventory = Gross margin on ending inventory * Share of Jubilee, Inc. in JPW Company = $6,000 * 35% = $2,100

Therefore, the amount of gross profit which Jubilee must defer in reporting this investment is equal to its share of gross profit in ending inventory which is $2,100.

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