ExpertHard1 markMultiple Choice
CPA · Question 23 · Area II: Technical Accounting
Parent Co. owns 80% of Sub Co. During the year, Sub Co. sold inventory to Parent Co. for $100,000. The inventory cost Sub Co. $60,000. At year-end, 40% of this inventory remains in Parent Co.'s warehouse. What amount of unrealized gross profit must be eliminated from the consolidated inventory balance?
Parent Co. owns 80% of Sub Co. During the year, Sub Co. sold inventory to Parent Co. for $100,000. The inventory cost Sub Co. $60,000. At year-end, 40% of this inventory remains in Parent Co.'s warehouse. What amount of unrealized gross profit must be eliminated from the consolidated inventory balance?
Answer options:
A.
$40,000
B.
$24,000
C.
$16,000
D.
$12,800
How to approach this question
1. Calculate total intercompany profit ($100k - $60k = $40k). 2. Determine % remaining in ending inventory (40%). 3. Multiply total profit by % remaining. Note: Eliminate 100% of the unrealized profit, regardless of NCI.
Full Answer
C.$16,000✓ Correct
C
Intercompany profit must be fully eliminated in consolidation. Total Profit = $40,000. Since 40% of the goods are still on hand, 40% of the profit is unrealized. $40,000 × 0.40 = $16,000. The fact that Parent owns only 80% does not change the amount of inventory elimination (though it affects how the elimination is allocated between NCI and Controlling Interest).
Common mistakes
Eliminating only the parent's share (80%) of the profit; eliminating the full profit even for goods sold to third parties.
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