Question

10) Hernandez Inc. sold $160,000 in inventory to Diller Co. during 2020 for $250,000. Diller resold...

10) Hernandez Inc. sold $160,000 in inventory to Diller Co. during 2020 for $250,000. Diller resold $120,000 of this merchandise in 2020 with the remainder to be disposed of during 2021.

Required: Assuming Hernandez owns 30% of Diller and applies the equity method, prepare the journal entry Hernandez should have recorded at the end of 2020 to defer gross profit on intra-entity inventory sales.


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Hernandez Inc holds 30% of Diller Co. It means Diller Co. is an associate of Hernandez Inc. Hernandez Inc will apply equity method.

Total Unrealised profit on sale by Hernandez Inc to Diller Co. = $250000 - $160000 = $90000

Gross Profit ratio = $90000/$25000 * 100 = 36%

Unrealised profit = $90000 * 30% = $27000

Closing Stock lying with Diller Co. = $250000 - $120000 = $130000

Unrealized gain = $130000 * 36% = $46800

Ownership percentage - 30%

Hernandez Inc's share of unrealized gain = $46800 * 30% = $14040

Journal entry to eliminate unrealised profit on intra entity inventory sales:

Date Account Name Debit ($) Credit ($)
2020 Equity Income $14040
Investment in Diller Co. $14040

To defer the unrealized profit in the books of parent, always debit Income and credit the Investment as there is no real income involved if combined balance sheet is prepared/

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