Strickland Company sells inventory to its parent, Carter Company, at a profit during 2010. One-third of the inventory is sold by Carter in 2010. In the consolidation worksheet for 2010, which of the following choices would be a credit entry to eliminate the intra-entity transfer of inventory?
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 the intra-entity transfer of inventory would be Cost of goods sold because it is the account that reflects the cost of the inventory sold by Carter to outside customers. This entry will decrease the profit recorded by Strickland Company on the intercompany sale and increase the profit recorded by Carter Company on the sale to outside parties. All other options are not related to the elimination of the intercompany transfer of inventory. Retained earnings, investment in Strickland Company, and inventory are all balance sheet accounts, while sales is a revenue account that is not affected by the elimination of the intra-entity transfer.

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