Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012.
In the consolidation worksheet for 2013, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Strickland Company.
E) Sales.

Question

Quizplus · Accepted Answer

The unrealized intra-entity gross profit from the previous year (2012) would have been closed to retained earnings at the end of that year. Therefore, in 2013, the debit entry to eliminate this unrealized profit would be to retained earnings.

Strickland Company Sells Inventory to Its Parent, Carter Company, at a Profit