Company A sells inventory to its subsidiary, Company B 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

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The Answer of Company A sells inventory to its subsidiary, Company B 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.

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