A subsidiary entity sold goods to its parent entity for $100 000.The inventory originally cost the subsidiary $125 000.At reporting date,the parent still held all of the inventory.Which of the following adjustments must be included as part of the consolidation entry to eliminate this transaction?
A)Cr Inventory $100 000
B)Cr Inventory $125 000
C)Dr Inventory $25 000
D)Dr Inventory $225 000

Question

Quizplus · Accepted Answer

The transaction between the subsidiary and the parent involves only a transfer of goods, and no profit has been earned. Therefore, the cost of inventory should be removed from the subsidiary's books, and an offsetting credit should be made to recognize the reduction in the parent's ownership equity. The amount of the credit is the amount paid by the parent, which is $100,000. Option A represents this adjustment. Option B is incorrect because it would overstate the subsidiary's cost of goods sold by $25,000. Option C is incorrect because it would understate the subsidiary's cost of goods sold by $25,000. Option D is incorrect because it would overstate the subsidiary's cost of goods sold by $225,000.

A Subsidiary Entity Sold Goods to Its Parent Entity for $100