Question

Parent owns 75% of the outstanding common stock of Sub. During 2014, Parent's profits on its inventory sales to Sub amounted to $50,000. All merchandise purchased by Sub was then sold to outside customers. The consolidation elimination for intercompany profit on the transaction is:__________.

Answer 1

The consolidation elimination for intercompany profit on the transaction is $37,500 ($50,000 * 75%). The parent owns 75% of the outstanding common stock of Sub, so it has a controlling interest in Sub. To eliminate the intercompany profit in the consolidation, the profit needs to be removed.

Step-by-step explanation:

The consolidation elimination for intercompany profit on the transaction is $37,500 ($50,000 * 75%).

The parent owns 75% of the outstanding common stock of Sub, so it has a controlling interest in Sub. When Parent sells inventory to Sub, it realizes a profit on those sales. To eliminate this intercompany profit in the consolidation, the profit needs to be removed.

The intercompany profit is calculated by multiplying the profit on inventory sales by the parent's ownership percentage (75%). Therefore, the consolidation elimination for intercompany profit on the transaction is $37,500 ($50,000 * 75%).