Mallard Ltd.acquired 75% of the outstanding common shares of Teal Ltd.at December 31,20X1 for $900,000.Mallard has recorded its investment using the cost method.At the end of 20X7,Mallard still had $40,000 of goods purchased from Teal in its inventory and Teal had $50,000 of goods purchased from Mallard in its inventory.Both companies had gross margins of 40% in their sales of goods to each other and both companies sold these goods in 20X8.What adjustment should be made for Mallard's 20X8 consolidated financial statements with respect to the goods purchased from Teal that were still in Mallard's opening inventory?

Question

Quizplus · Accepted Answer

Mallard needs to adjust its cost of sales for the $40,000 of goods purchased from Teal that were still in its inventory at the end of 20X7. This adjustment will decrease Mallard's profit and therefore decrease opening retained earnings. Since Teal owns the remaining 25% of its outstanding common shares, the adjustment will also decrease opening non-controlling interest by $10,000 (25% of $40,000). Therefore, the correct option is A. Option B is incorrect because it incorrectly increases opening non-controlling interest. Option C is incorrect because it incorrectly decreases sales. Option D is incorrect because a realization of profits does not negate the need for adjustments in consolidation.