Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2011, Kile sold merchandise to Prince for $140,000. At December 31, 2011, 50% of this merchandise remained in Prince's inventory. For 2011, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intra-entity profit in ending inventory at December 31, 2011 that should be eliminated in the consolidation process is
A) $28,000.
B) $56,000.
C) $22,400.
D) $21,000.
E) $42,000.

Question

Quizplus · Accepted Answer

The unrealized intra-entity profit is the difference between the sales price and the cost of goods sold. For Prince, the cost of goods sold is 70% of the sales price, or $98,000 (140,000 x 0.70). The unrealized intra-entity profit is therefore $42,000 (140,000 - 98,000). Since 50% of the merchandise remains in Prince's inventory, the amount of unrealized intra-entity profit that should be eliminated in the consolidation process is $21,000 (42,000 x 0.50).