Question 1

Parent Co. acquired 80% of Sub Co. on January 1, Year 1. During Year 1, Parent sold inventory to Sub for $200,000. The cost of the inventory to Parent was $140,000. At December 31, Year 1, 30% of this inventory remained in Sub'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

Calculate the total gross profit on the intercompany transaction. Determine the percentage of inventory remaining unsold at year-end. Multiply the total gross profit by the unsold percentage to find the unrealized profit to eliminate from inventory.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Eliminating the entire profit; eliminating the realized portion instead of the unrealized portion; applying the tax rate when the question asks for the inventory adjustment (gross).

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 4

More questions from this exam