A subsidiary entity sold goods to its parent entity for $100 000. The inventories originally cost the subsidiary $125 000. At reporting date, the parent still held all of the inventories. Which of the following adjustments must be included as part of the consolidation entry to eliminate this transaction?
A) Cr Inventory $100 000
B) Cr Inventory $125 000
C) Dr Inventory $25 000
D) Dr Inventory $225 000

Question

Quizplus · Accepted Answer

Since the parent still holds the inventories at reporting date, we need to eliminate the impact of the transaction on the subsidiary's books. This means we need to reduce the subsidiary's inventory balance by the amount of the sale to the parent. Therefore, we need to credit the inventory account by $100,000 to eliminate the impact of the intra-group sale. Option B is incorrect because it would credit the entire inventory cost, whereas only the sale amount needs to be credited. Options C and D are incorrect because a debit to inventory is not necessary in this case, as the subsidiary has already recorded the cost of the inventories when they were purchased.

A Subsidiary Entity Sold Goods to Its Parent Entity for $100