What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Morecombe Limited is the parent of Wise Limited? (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.
A) cannot determine from the information given
B) $300
C) $625
D) $1250

Question

Quizplus · Accepted Answer

The unrealised profit is calculated on the inventory that remains within the group at the end of the period. Morecombe initially purchases inventory for $20 each and sells it to Wise with a 25% markup, making the sale price $25 each ($20 * 1.25). Wise sells half of the 500 units externally, leaving 250 units. Half of the remaining 250 units (125 units) are sold back to Morecombe, leaving 125 units within the group. The unrealised profit per unit is $5 (the markup), so for 125 units, the unrealised profit is $625 (125 units * $5).

What Is the Amount of Unrealised Profit That Needs to Be