Question 1

Parch Co. owns 80% of Scribe Inc. During Year 1, Parch sold inventory to Scribe for $500,000. The cost of the inventory to Parch was $350,000. At December 31, Year 1, 40% of this inventory remained in Scribe's warehouse.
Both companies have a 30% tax rate. What amount of unrealized gross profit must be eliminated from the consolidated inventory balance at December 31, Year 1?

Accepted Answer

Identify the intercompany gross profit. Determine the percentage of goods remaining in ending inventory. Multiply total GP by that percentage.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Applying the tax rate (the question asks for the inventory adjustment, which is pre-tax; the DTA adjustment is separate). Eliminating the entire profit ($150k) instead of just the unsold portion.

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 3

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