A subsidiary sold inventories to its parent for $40 000. The inventories originally cost the subsidiary $32 000. At balance sheet date, the parent had 20% of the inventories still on hand. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to:
A) $6400.
B) $1600.
C) $8000.
D) $9600.

Question

Quizplus · Accepted Answer

The unrealized profit is calculated on the unsold inventory that remains with the parent company. The profit on the total sale is $40,000 - $32,000 = $8,000. Since 20% of the inventory is still on hand, the unrealized profit to be eliminated is 20% of $8,000, which is $1,600.

A Subsidiary Sold Inventories to Its Parent for $40 000