Alice Ltd sold inventory items to its subsidiary Mad Hatter Ltd and had the following intercompany transactions:
Cost of inventory $100 000 sold for $125 000 for the year ended 30 June 2012.Half of the inventory items were sold by Mad Hatter Ltd to external parties before the financial year end 30 June 2012.
Cost of inventory $75 000 sold for $100 000 for the year ended 30 June 2013.Half of the inventory items were sold by Mad Hatter Ltd to external parties before the financial year end 30 June 2013.
Ignoring taxes,which of the following statements is correct with respect to this transaction only for the year ended 30 June 2013?
A) Consolidated sales will decrease by $125 000.
B) Consolidated sales will increase by $25 000.
C) Consolidated profit will decrease by $12 500.
D) There will be no change in the consolidated profit.

Question

Quizplus · Accepted Answer

For the year ended 30 June 2013, the intercompany transactions must be eliminated in consolidation. Since half of the inventory was sold to external parties, the unrealized profit on the remaining half still within the group must be eliminated. However, the question asks specifically about the effect on consolidated profit, not the unrealized profit adjustment. The sales and cost of sales between Alice Ltd and Mad Hatter Ltd are eliminated against each other in consolidation, meaning there's no net effect on the consolidated profit from this intercompany transaction alone.

Alice Ltd Sold Inventory Items to Its Subsidiary Mad Hatter