During the current period, a subsidiary entity sold inventories 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 inventories were 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 to eliminate the profit on intercompany sale of inventories requires the elimination of the profit and the cost of inventories transferred. The profit was $8 000 (sales price of $28 000 - cost of $20 000). Therefore, the entry should include a debit to Intercompany profit and a credit to Cost of sales for $8 000. The cost of the inventories transferred was $20 000. Thus, the entry should also include a credit to Inventory for $20 000. The total credit to Cost of sales would be $20 000, representing the elimination of the cost of the inventories sold to the parent. Therefore, the correct answer is B.

During the Current Period, a Subsidiary Entity Sold Inventories to Its