Question

1. Given the following information: a. Parent sells Sub inventory with a cost of $45,000 for $55,000. Sub then sells this inventory to outsiders for $70,000. b. Parent sells Sub inventory with a cost of $15,000 for $20,000, which remains on hand in Sub’s ending inventory.

a.Calculate unrealized profits .

b.Pass eliminating entry in both the cases:

1.Parent sells to Sub and Sub to Outsider

2. Parent sells to Sub, but Sub not yet to Outsider

c.How would it effect Parents gross profit and Sub’s inventory?

Answer 1

a)

Unrealized profits = Profit realized by parents on goods sold to subsidiary and it is still unsold with subsidiary

= Sale value of goods by Parents to Subsidiary - Cost of goods = 20000 - 15000 = 5000

b)

1)

Parents sell to sub and sub to Outsider:

There will be no eliminating entry because goods have already been sold to outsider by subsidiary and profit has been realised on those goods. Eliminating entry is to be passed only when goods sold by parents to subsidiary at profit and such goods is remain unsold with subsidiary i.e. such goods have not been sold to outsider and become part of ending inventory of subsidiary.

In the given question, Profit of $10000 (55000 - 45000) is to be recognised by Parent company and Profit of $15000 (70000 - 55000) is to be recognised by Subsidiary company.

2)

Parents sell to sub, but Sub not yet to Outsider:

Unrealised profit = 20000 - 15000 = 5000

Eliminating entry to be passed in consolidation:

Cost of goods sold Dr 5000

Inventory Account Cr 5000

c)

Parents gross profit will be decreased by $5000 i.e. unrealised profit on goods sold to inventory and Sub's inventory will be reduced by $5000 i.e. unrealised profit on inventory account.