A subsidiary sold inventory to its parent for $60 000.The inventory had previously cost the subsidiary $48 000.By reporting date,the parent had sold 75% of the inventory to a party outside the group.The company tax rate is 30%.Which of the following are the adjustment entries in the consolidation worksheet at reporting date?

Question

Quizplus · Accepted Answer

The adjustment entry needed is to remove the unrealized profit on inventory sold to the parent. 
The unrealized profit is the difference between the selling price ($60,000) and the cost to the subsidiary ($48,000), which is $12,000. 
To remove this unrealized profit from the consolidated financial statements, the following entry is made: 
Dr. Inventory $48,000 
Cr. Cost of Sales $48,000 (eliminating the intercompany sale) 
Dr. Cost of Sales $9,000 (eliminating the remaining profit on inventory sold to the outside party - 25% of $12,000) 
Cr. Unrealized profit on intercompany sale $9,000 
Therefore, the correct choice is B.

A Subsidiary Sold Inventory to Its Parent for $60 000