Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher.
In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate the intra-entity transfer of inventory?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Question

Quizplus · Accepted Answer

The intra-entity transfer of inventory involves a sale from Walsh to Fisher, which increases Fisher's inventory and decreases Walsh's inventory. To eliminate this transaction in the consolidation worksheet, a corresponding decrease (credit) must be made to Fisher's inventory and an increase (debit) must be made to Walsh's cost of goods sold. Therefore, the correct entry to eliminate the intra-entity transfer of inventory is to credit cost of goods sold. The other options (A, C, D, and E) do not reflect the correct accounting treatment for this transaction.

Walsh Company Sells Inventory to Its Subsidiary, Fisher Company, at a Profit