Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2010. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. 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 Fisher Company.
E) Sales.

Question

Quizplus · Accepted Answer

Intra-entity transfers of inventory result in double-counting of the profits. To eliminate this effect, the cost of goods sold account is credited in the consolidation worksheet. This entry reduces the retained earnings of the parent company (Walsh), as it eliminates the parent's profit on the sale of inventory to the subsidiary. The investment in Fisher Company account is already eliminated during consolidation, so it does not need to be adjusted. The inventory and sales accounts are also not involved in this elimination entry.

Walsh Company Sells Inventory to Its Subsidiary, Fisher Company, at a Profit