ExpertHard1 markMultiple Choice
CPA · Question 32 · Area II: Technical Accounting
Parent Co sold inventory to Subsidiary Co for $100,000 (Cost $60,000). At year-end, Subsidiary Co had sold 40% of this inventory to outside parties. What is the amount of unrealized gross profit to be eliminated in consolidation?
Parent Co sold inventory to Subsidiary Co for $100,000 (Cost $60,000). At year-end, Subsidiary Co had sold 40% of this inventory to outside parties. What is the amount of unrealized gross profit to be eliminated in consolidation?
Answer options:
A.
$40,000
B.
$16,000
C.
$24,000
D.
$20,000
How to approach this question
1. Calculate Total Intercompany Profit ($100k - $60k = $40k). 2. Determine % remaining in ending inventory (100% - 40% sold = 60%). 3. Multiply Profit by % Remaining.
Full Answer
C.$24,000✓ Correct
C
The profit on the 40% sold is realized. The profit on the 60% remaining in inventory is unrealized. Total Profit = $40,000. Unrealized = $40,000 * 0.60 = $24,000.
Common mistakes
Eliminating the realized profit; eliminating the full profit amount.
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