P Ltd sells inventory to its subsidiary S Ltd on the following basis: cost to P $60 000,sale price to S $80 000.All inventory is held by S at the end of the financial year (assume a tax rate of 30%).The periodic method is used to account for inventory.Therefore,which of the following consolidation entries are required?

A)$\begin{array} { l l }
\text { Dr. Sales } & \$ 80,000 \
\text { Cr. Cost of Sales } & \$ 80,000
\end{array}$
B)$\begin{array} { l c }
\text { Dr. Sales } & \$ 80,000 \
\text { Cr. Cost of Sales } & \$ 80,000 \
\text { Dr. Closing Inventory } & \$ 20,000 \
\text { Cr. Inventory } & \$ 20,000
\end{array}$
C)As for $B$ plus
Dr. Deferred Tax Asset $\$ 6000$
Cr. Income Tax expense $\$ 6000$
D) None of the above

Question

P Ltd sells inventory to its subsidiary S Ltd on the following basis: cost to P $60 000,sale price to S $80 000.All inventory is held by S at the end of the financial year (assume a tax rate of 30%) .The periodic method is used to account for inventory.Therefore,which of the following consolidation entries are required?

A)$\begin{array} { l l } 
\text { Dr. Sales } & \$ 80,000 \
\text { Cr. Cost of Sales } & \$ 80,000
\end{array}$
B)$\begin{array} { l c } 
\text { Dr. Sales } & \$ 80,000 \
\text { Cr. Cost of Sales } & \$ 80,000 \
\text { Dr. Closing Inventory } & \$ 20,000 \
\text { Cr. Inventory } & \$ 20,000
\end{array}$
C)As for $B$ plus
Dr. Deferred Tax Asset $\$ 6000$
Cr. Income Tax expense $\$ 6000$
D) None of the above

Quizplus · Accepted Answer

The consolidation entries must eliminate the intercompany sale and adjust the inventory to its original cost. Additionally, a deferred tax asset is recognized for the unrealized profit in inventory, calculated as $20,000 (unrealized profit) x 30% (tax rate) = $6,000.

P Ltd Sells Inventory to Its Subsidiary S Ltd on the Following