A Company sells inventory to its Subsidiary, B Company at a mark-up of 20% on cost. Of what significance is this transaction, should A wish to prepare Consolidated Financial Statements? The inventory is still in B's warehouse at year end.
A) This is not significant. Any inter-company profits are eliminated during the Consolidation process.
B) A's net income will be under-stated.
C) B's income will be over-stated.
D) There will be unrealized profits in inventory which will only be realized once B sells this inventory to outsiders.

Question

Quizplus · Accepted Answer

Unrealized profits in inventory must be eliminated in consolidation until the inventory is sold to an external party.

A Company Sells Inventory to Its Subsidiary, B Company at a Mark-Up