Merritt Company prepares consolidated financial statements with its wholly-owned subsidiary, Simon Ltd.Simon's functional currency is the British pound.At the end of the fiscal year, Simon has GBP 50,000 of inventory on hand that it purchased from Merritt when the exchange rate was $1.60 to 1 GBP.Merritt's standard gross profit percentage is 40%.The current rate at December 31 was $1.55 to 1 GBP and the average rate for the year was $1.58 to 1 GBP.
The amount of intercompany profit that should be eliminated from inventory is:

Question

Merritt Company prepares consolidated financial statements with its wholly-owned subsidiary, Simon Ltd.Simon's functional currency is the British pound.At the end of the fiscal year, Simon has GBP 50,000 of inventory on hand that it purchased from Merritt when the exchange rate was $1.60 to 1 GBP.Merritt's standard gross profit percentage is 40%.The current rate at December 31 was $1.55 to 1 GBP and the average rate for the year was $1.58 to 1 GBP. ​
The amount of intercompany profit that should be eliminated from inventory is:

Quizplus · Accepted Answer

The intercompany profit to be eliminated is calculated as the gross profit percentage (40%) of the inventory's cost in USD. The cost in USD is GBP 50,000 * $1.60 = $80,000. The profit is 40% of $80,000, which is $32,000.

Merritt Company Prepares Consolidated Financial Statements with Its Wholly-Owned Subsidiary