Angelo Limited sold inventory to its parent entity at a profit of $4 000. The inventory cost Angelo Limited $16 000. At the end of the reporting period the parent had sold 50% of the inventory to an external party. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to:

Question

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The unrealized profit on the sale from Angelo Limited to its parent entity is $4,000 ($20,000 selling price - $16,000 cost). However, only 50% of the inventory was sold to an external party, which means only 50% of the profit was realized. Therefore, the consolidation adjustment entry should eliminate half of the unrealized profit, which is $2,000. Option A is the only choice that includes $2,000 as an answer.

Angelo Limited Sold Inventory to Its Parent Entity at a Profit