What is the amount of unrealised profit that needs to be eliminated at the end of the period,in the following situation,where Morecombe Limited is the parent of Wise Limited? (Ignore the tax effect) Morecombe purchases 500 units of inventory for $20 each.Morecombe sells this entire inventory to Wise at a mark up of 25 per cent.Wise then sells half of the inventory to an external party.Half of the remaining amount (after the external sale)is sold back to Morecombe for $2,500.
A) Cannot determine from the information given.
B) $300.
C) $625.
D) $1 250.
E) $2 500.

Question

Quizplus · Accepted Answer

The cost of the inventory for Wise was $25 per unit (including the 25% markup). After selling half to an external party, Wise had 250 units remaining. Half of those (125 units) were sold back to Morecombe for $2,500, which means that Morecombe paid $20 per unit for those units. However, Wise had to use the remaining 125 units to make up for the units sold to Morecombe at cost, so they effectively lost the markup on those units, which is $5 per unit ($25 selling price - $20 cost). Therefore, the unrealized profit that needs to be eliminated is $625 (125 units x $5 per unit).

What Is the Amount of Unrealised Profit That Needs to Be