ExpertHard1 markMultiple Choice
CPA · Question 02 · Area I: Financial Reporting
Parent Co. acquired 80% of Sub Co. on January 1, Year 1. During Year 1, Parent sold inventory to Sub for $200,000. The cost of the inventory to Parent was $140,000. At December 31, Year 1, 30% of this inventory remained in Sub's warehouse. 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?
Parent Co. acquired 80% of Sub Co. on January 1, Year 1. During Year 1, Parent sold inventory to Sub for $200,000. The cost of the inventory to Parent was $140,000. At December 31, Year 1, 30% of this inventory remained in Sub's warehouse. 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.
$60,000
B.
$42,000
C.
$18,000
D.
$12,600
How to approach this question
Calculate the total gross profit on the intercompany transaction. Determine the percentage of inventory remaining unsold at year-end. Multiply the total gross profit by the unsold percentage to find the unrealized profit to eliminate from inventory.
Full Answer
C.$18,000✓ Correct
Intercompany Sales: $200,000<br/>Cost of Sales: $140,000<br/>Total Gross Profit: $60,000<br/><br/>Inventory remaining at year-end: 30%<br/>Unrealized Gross Profit in Ending Inventory = Total GP * 30%<br/>$60,000 * 0.30 = $18,000.<br/><br/>This amount must be eliminated from Inventory (Credit Inventory, Debit COGS/RE). Note: The question asks for the amount eliminated from the inventory balance, which is the gross amount, not net of tax.
Common mistakes
Eliminating the entire profit; eliminating the realized portion instead of the unrealized portion; applying the tax rate when the question asks for the inventory adjustment (gross).
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