On January 1,20X3,Dwayne Ltd.formed Carlos Co. ,a 100% owned subsidiary.During 20X6,Dwayne sold Carlos $100,000 in goods.The unrealized profit in Carlos' inventories was $20,000 at December 31,20X5 and $25,000 at December 31,20X6.Ignoring income taxes,what adjustment should be made to the consolidated financial statements for the year ended December 31,20X6 to reflect the unrealized profit in Carlos' beginning inventory?
A)Inventory at December 31,20X6 should be decreased by $20,000.
B)Cost of goods sold for 20X6 will be decreased by $20,000.
C)Retained earnings at the end of 20X6 will be increased by $20,000.
D)Retained earnings at the end of 20X6 will be decreased by $20,000.

Question

Quizplus · Accepted Answer

The adjustment needed to reflect the unrealized profit in Carlos' beginning inventory is to decrease the cost of goods sold for 20X6 by $20,000. This is because the profit was not yet realized until the goods were sold to Carlos during the year, so it should not be recognized as part of the consolidated financial statements until the goods are actually sold. The other options are not correct as they do not reflect this timing issue correctly.