Sand Co. a 65%-owned subsidiary of Pond Inc. made the following entry to record

Question

Sand Co. a 65%-owned subsidiary of Pond Inc. made the following entry to record a sale of merchandise to Pond:

Accounts Receivable   60,000

Sales Revenue             60,000

All Sand sales are at 125% of cost. One-third of this merchandise remained in the Pond’s inventory at year-end. A working paper entry to eliminate unrealized profits from consolidated inventory would include a credit to Inventory in the amount of

$ 8,000.

$10,000.  

$ 4,000.

$ 5,000.

$ 8,000.

$10,000.  

$ 4,000.

$ 5,000.

Explanation / Answer

Solution: As the stock left from the total sales is 1/3. Hence stock left is 20000(1/3 of 60000)

This stock is at cost plus 25%. As at the time of consolidation we need to eliminate this unrealised profit.. We will calculate the amount of unrealised profit which is as follows :

Unrealised profit =20000*.25/1.25= 4000

Hence answer is C

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