Pruitt Company owns 80% of Stoney Company's common stock.During 2014, Stoney sold $400,000 of merchandise to Pruitt.At December 31, 2014, one-fourth of the merchandise remained in Pruitt's inventory.In 2014, gross profit percentages were 25% for Pruitt and 30% for Stoney.The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is

Question

Quizplus · Accepted Answer

- Pruitt owns 80% of Stoney's common stock, which means that any profit made by Stoney on merchandise sold to Pruitt needs to be adjusted to eliminate the impact of the intercompany transaction.
- Stoney sold $400,000 of merchandise to Pruitt, so the intercompany profit is $400,000 x (30% - 25%) = $20,000.
- One-fourth of the merchandise remained in Pruitt's inventory at the end of the year, so the intercompany profit that needs to be eliminated is $20,000 x 1/4 = $5,000.
- Since Pruitt owns 80% of Stoney, the amount of unrealized intercompany profit that should be eliminated in the consolidated statements is $5,000 x 80% = $4,000.
- However, the question is asking for the amount of unrealized intercompany profit, not the adjustment. Therefore, the answer is $4,000 x 5 (the remaining 1/5th of Stoney's shares that are not owned by Pruitt) = $20,000. 
- Therefore, the correct answer is C) $30,000.

Pruitt Company Owns 80% of Stoney Company's Common Stock