Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012.
In the consolidation worksheet for 2012, 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 intra-entity transfer of inventory results in a profit for Strickland Company and a corresponding increase in inventory for Carter Company. To eliminate the impact of this transaction in the consolidation, the cost of goods sold account needs to be credited to offset the profit recognized by Strickland. This will also reduce the inventory balance in Carter Company's books, reflecting the actual amount of inventory that was sold to external customers. The other choices are not relevant for this purpose: Retained earnings would be affected by the transfer only if there was a dividend declared by either company, which is not mentioned in the scenario; Inventory and Sales are already part of the transaction and cannot be used to eliminate it; Investment in Strickland Company is not affected by this transaction, but rather by the initial acquisition, which is outside the scope of this question.

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