Steven Company Owns 40% of the Outstanding Voting Common Stock

question 33

Short Answer

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2011, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2011, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2010, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2010. Additional sales were made to Steven in 2011 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2011 purchases had not been sold to outsiders by the end of 2011.
What amount of unrealized intra-entity inventory profit should be deferred by Steven at December 31, 2010?

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Definitions:

Illegality

The quality or state of being contrary to law; actions or conditions that are against the law.

Statute Of Frauds

A legal principle requiring certain types of contracts to be written and signed in order to be enforceable.

Bound By Contracts

A phrase indicating that parties are legally obligated to adhere to the terms outlined in a contract they have entered into.

Presumed

Accepted as true or valid based on the evidence until proven otherwise.