Jubilee, Inc., owns 30 percent of JPW Company and applies the equity method. During the current year, Jubilee buys inventory costing $110,400 and then sells it to JPW for $138,000. At the end of the year, JPW still holds only $25,300 of merchandise. What amount of gross profit must Jubilee defer in reporting this investment using the equity method

the gross profit reported is $1,518

Explanation:

The computation of the amount of gross profit that reported is shown below:

But before that the gross profit percentage is

= (Sales - cost of goods sold) ÷ (sales)

= ($138,000 - $110,400) ÷ ($138,000)

= 20%

Now the gross profit is

= $25,300 × 20% × 30%

= $1,518

Hence, the gross profit reported is $1,518

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