Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2013, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?
A)Retained earnings.
B)Cost of goods sold.
C)Inventory.
D)Investment in Strickland Company.
E)Sales.

Question

Quizplus · Accepted Answer

The credit entry to eliminate unrealized intra-entity gross profit would be to reduce the cost of goods sold in Carter's books (the buyer) by the amount of the unrealized profit. This is because the intra-entity profit has already been recorded on Strickland's books (the seller). Therefore, the correct entry to eliminate the intra-entity profit would be a credit to cost of goods sold.

Strickland Company Sells Inventory to Its Parent, Carter Company, at a Profit