A subsidiary entity sold inventory to its parent entity at a profit of $8 000.The goods had originally cost the subsidiary $20 000.At the end of the year all the inventory was still on hand.The adjustment entry to deal with this transaction on consolidation would include the following line item:

Question

Quizplus · Accepted Answer

The adjustment entry would be to eliminate the profit on sales between the subsidiary and parent, and to adjust the inventory balance to its original cost. This would be achieved by crediting the subsidiary's cost of sales account for the original cost of the inventory sold ($20,000) and debiting the parent's inventory account for the same amount. There would be no adjustment for the profit on the sale, since this would be eliminated in the consolidation process. Therefore, the correct choice is B, which credits cost of sales for $20,000.

A Subsidiary Entity Sold Inventory to Its Parent Entity at a Profit