Robson Ltd. acquired 80% of Cool Co. in 2012. During 2012, Cool sold inventory to Robson. At the end of 2013, the goods were still in Robson's inventory. Robson correctly eliminated the $20,000 of unrealized profits on its 2013 consolidated financial statements and the goods were finally sold in 2014. In preparing its 2014 consolidated financial statements, what adjustments should be made with respect to the previously unrealized profit?
A)Decrease cost of sales by $20,000, decrease beginning retained earnings by $16,000, and decrease the beginning non-controlling interest by $4,000.
B)Increase both cost of sales and beginning retained earnings by $20,000.
C)Increase cost of sales by $20,000, increase beginning retained earnings by $16,000, and increase the beginning non-controlling interest by $4,000.
D)No entry is required.

Question

Quizplus · Accepted Answer

Since the unrealized profits were eliminated in the previous year, they should now be recognized in the current year when the goods are sold. Therefore, the cost of sales for the current year should be decreased by $20,000 to adjust for the previously eliminated profit. This will also decrease the net income and, consequently, the retained earnings. As 80% of the profit belongs to Robson Ltd, the entire $20,000 will be deducted from its retained earnings ($20,000 x 80%). The non-controlling interest's share of the unrealized profit, which is 20% of $20,000 or $4,000, will be added to the beginning non-controlling interest. Therefore, the correct option is A.