Question 1

Parent Co. owns 80% of Sub Co. During Year 1, Parent sold inventory to Sub for $500,000. The cost of the inventory to Parent was $350,000. At December 31, Year 1, Sub had sold 60% of this inventory to outside parties. The tax rate is 25%. In the consolidated balance sheet at December 31, Year 1, by what amount should the inventory be reduced to eliminate the intercompany profit?

Accepted Answer

1. Calculate total intercompany gross profit. 2. Determine the % of inventory remaining. 3. Multiply total profit by remaining % to find unrealized profit. 4. Reduce inventory by this amount.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Eliminating the entire profit ($150k) instead of just the unsold portion; applying the tax rate to the inventory reduction.

How to approach this question

Full Answer

Common mistakes

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