Pruitt Company owns 80% of Stoney Company's common stock. During 2017, Stoney sold $400,000 of merchandise to Pruitt. At December 31, 2017, one-fourth of the merchandise remained in Pruitt's inventory. In 2017, 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

The unrealized intercompany profit is calculated on the portion of inventory that remains unsold at year-end. Stoney's gross profit percentage is 30%, so the unrealized profit on the remaining inventory is 30% of $100,000 (one-fourth of $400,000), which equals $30,000.

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