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 2013, which of the following choices would be a credit 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 Fisher Company.
E) Sales.

Question

Quizplus · Accepted Answer

To eliminate unrealized intra-entity gross profit, we need to reduce both the revenue and the cost of goods sold related to the intercompany sale made in 2012. The credit entry should be to Cost of Goods Sold to reduce the profit recognized in 2012. The other options are not relevant to eliminating unrealized gross profit. Retained earnings, inventory, and investment in Fisher Company are balance sheet accounts, while sales is a revenue account, and it is not appropriate to reverse a revenue account to eliminate unrealized intra-entity gross profit.

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