An investor sells inventory to a company subject to significant influence in which it holds a 25% interest for $100 and makes a profit of $40. The investor is using the equity method. The goods are still in the investee’s warehouse at year end. How much profit would the investor be allowed to recognize?

An investor sells inventory to a company subject to significant influence in which it holds a 25% interest for $100 and makes a profit of $40. The investor is using the equity method. The goods are still in the investee’s warehouse at year end. How much profit would the investor be allowed to recognize?

The investor would only be allowed to recognize $30 (i.e. 75% of the profits).  This is due to the fact that any gain or loss that occurs would be recognized in income at the time of the transfer or sale only to the extent of the interests of the other non-related investors.

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