ExpertHard1 markMultiple Choice
CPA · Question 04 · Area I: Financial Reporting
Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The cost of the inventory to Parch was $350,000. At December 31, Year 1, 40% of this inventory remained in Scribe's warehouse. <br/>Both companies have a 30% tax rate. What amount of unrealized gross profit must be eliminated from the consolidated inventory balance at December 31, Year 1?
Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The cost of the inventory to Parch was $350,000. At December 31, Year 1, 40% of this inventory remained in Scribe's warehouse. <br/>Both companies have a 30% tax rate. What amount of unrealized gross profit must be eliminated from the consolidated inventory balance at December 31, Year 1?
Answer options:
A.
$150,000
B.
$60,000
C.
$42,000
D.
$120,000
How to approach this question
Identify the intercompany gross profit. Determine the percentage of goods remaining in ending inventory. Multiply total GP by that percentage.
Full Answer
B.$60,000✓ Correct
1. Calculate Total Intercompany Gross Profit: Sale Price ($500,000) - Cost ($350,000) = $150,000.<br/>2. Determine Unrealized Portion: 40% of the inventory is still on hand.<br/>3. Unrealized Profit = $150,000 × 40% = $60,000.<br/>This amount must be credited to Inventory (and debited to COGS/RE) to reduce the inventory to its original cost to the consolidated entity.
Common mistakes
Applying the tax rate (the question asks for the inventory adjustment, which is pre-tax; the DTA adjustment is separate). Eliminating the entire profit ($150k) instead of just the unsold portion.
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