What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Morecombe Plc is the parent of Wise Plc? (Ignore the tax effect.)
Morecombe purchases 500 units of inventory for £20 each.Morecombe sells this entire inventory to Wise at a mark up of 25%.Wise then sells half of the inventory to an external party.Half of the remaining amount (after the external sale)is sold back to Morecombe for £2500.

Question

Quizplus · Accepted Answer

Morecombe sells the inventory to Wise at a mark up of 25%, which means that Wise pays £25 per unit. Therefore, Wise pays Morecombe a total of 500 x £25 = £12,500 for the inventory. 
Wise then sells half of the inventory to an external party, which means that Wise sells 250 units. The selling price to the external party is not given, and therefore cannot be used to calculate the unrealized profit. 
The remaining 250 units are sold back to Morecombe for £2500. This means that Morecombe pays Wise £10 per unit (£2500 ÷ 250 units) for the inventory. However, Wise originally purchased the inventory at a cost of £20 per unit from Morecombe. Therefore, Wise has an unrealized profit of £5 per unit (£25 selling price - £20 cost price) on the remaining 250 units. 
The total unrealized profit that needs to be eliminated is therefore 250 units x £5 per unit = £1250. However, since Wise and Morecombe are related parties, the unrealized profit should be divided equally between them (£1250 ÷ 2 = £625). Therefore, the answer is C) £625.

What Is the Amount of Unrealised Profit That Needs to Be