A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2016. Under the partial equity method, the workpaper entry in 2017 to recognize the intercompany profit in beginning inventory realized during 2017 includes a debit to:
A) Retained Earnings - P.
B) Noncontrolling interest.
C) Cost of Sales.
D) both Retained Earnings - P and Noncontrolling Interest.

Question

Quizplus · Accepted Answer

Under the partial equity method, when a subsidiary sells merchandise at a profit to its parent company, and that merchandise remains in inventory at the end of the year, the unrealized profit must be eliminated in consolidation. When the inventory is sold to an outside party in the next year (2017 in this case), the previously unrealized profit becomes realized. The workpaper entry to recognize this intercompany profit that was in the beginning inventory and realized during the year includes debiting both Retained Earnings - P (to adjust the parent's equity for its share of the profit) and Noncontrolling Interest (to adjust the noncontrolling shareholders' equity for their share of the profit), reflecting that the profit impacts both the parent and the noncontrolling interest's share of the subsidiary's earnings.

A 90% Owned Subsidiary Sold Merchandise at a Profit to Its