On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:

-Based on the preceding information,what amount of unrealized intercompany gross profit is eliminated in preparing the consolidated financial statements for the year?
A) $0
B) $5,000
C) $10,000
D) $15,000

Question

On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:
 
-Based on the preceding information,what amount of unrealized intercompany gross profit is eliminated in preparing the consolidated financial statements for the year?
A) $0 
B) $5,000 
C) $10,000 
D) $15,000

Quizplus · Accepted Answer

To calculate the unrealized intercompany gross profit, we need to convert the Canadian dollar sales amount to U.S. dollars using the exchange rate on the date of the sale:

C$40,000 x $0.80/C$1 = $32,000

The cost of goods sold is $30,000, so the gross profit on the sale is $2,000.

However, the intercompany transaction is still unrealized at the end of the year, so we need to eliminate the gross profit in preparing consolidated financial statements. Since this is a Canadian subsidiary with Canadian functional currency, we must use the average exchange rate for the year to translate the results into U.S. dollars:

Average exchange rate for the year: ($0.80 + $0.82 + $0.84 + $0.86)/4 = $0.83/C$

Unrealized intercompany gross profit = $2,000 x $0.83/C$ = C$2,660

Now, we convert this amount back to U.S. dollars using the exchange rate on the date of the sale:

C$2,660 x $0.80/C$1 = $2,128

Therefore, the amount of unrealized intercompany gross profit eliminated in preparing the consolidated financial statements is $10,000 (=$2,128 - $0).

On September 30, 20X8, Wilfred Company Sold Inventory to Jackson