Teckel Enterprises owns 100% of Dachsund Limited. At the beginning of the fiscal year, there was a profit in Teckel Enterprises inventory of $15,000 on goods acquired from Dachsund Limited in the previous period. The tax rate is 40%. What is the required consolidated financial statement adjustments?

Question

Quizplus · Accepted Answer

The profit of $15,000 in Teckel Enterprises' inventory from Dachsund Limited needs to be eliminated in consolidation. The tax effect ($15,000 * 40% = $6,000) reduces the net adjustment to retained earnings and cost of goods sold. Therefore, beginning retained earnings decrease by the after-tax amount ($15,000 - $6,000 = $9,000), cost of goods sold decreases by the full $15,000 to eliminate the intercompany profit, and income tax expense increases by $6,000 to reflect the tax effect of the adjustment.

Teckel Enterprises Owns 100% of Dachsund Limited