Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010. One-third of the inventory is sold by Carter in 2010.
-In the consolidation worksheet for 2011, assuming Carter uses the initial value methd of accounting for its investment in Strickland, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 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 elimination entry for unrealized gross profit on intra-entity sales involves a debit to "Inventory" and a credit to "Cost of Goods Sold." This adjustment decreases the inventory balance (since only external sales should be recorded at cost) and increases the cost of goods sold (since the profit on intra-entity sales should not be recognized until the goods are ultimately sold to a third party). None of the other options - Retained earnings, Investment in Strickland Company, or Sales - are affected by the elimination entry for unrealized gross profit.

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