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 2011, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales?
A) Retained earnings.
B) Cost of goods sold.
C) Inventory.
D) Investment in Fisher Company.
E) Sales.

Question

Quizplus · Accepted Answer

To eliminate unrealized intra-entity gross profit with regard to the 2010 intra-entity sales, the cost of goods sold needs to be credited. This is because the unrealized profit is reflected in the inventory of the subsidiary, and by crediting the cost of goods sold, the effect of this profit is removed from the consolidated financial statements. Retained earnings and investment in Fisher Company are not affected by this transaction. Inventory and sales were already recorded in the 2010 financial statements and are not relevant for eliminating unrealized intra-entity gross profit in the consolidation worksheet for 2011.

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