P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of the current year, one-third of the merchandise remains in S Company's inventory. Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper?

Question

Quizplus · Accepted Answer

The intercompany profit to be eliminated is based on the unsold inventory. The original intercompany profit is $60,000 ($300,000 - $240,000). One-third of the merchandise remains, so one-third of the profit is $20,000. However, since the inventory was written down to $92,000, the cost of the remaining inventory is $80,000 ($240,000 * 1/3). The profit to be eliminated is $12,000 ($92,000 - $80,000).

P Company Sold Merchandise Costing $240,000 to S Company (90