Question

Parent has unconfirmed profits in its beginning inventory. The working paper elimination for these profits will include?

1) Adjusting entry
2) Closing entry
3) Reversing entry
4) Journal entry

Answer 1

A working paper elimination for unconfirmed profits in a parent company's beginning inventory includes debiting inventory, crediting revenue or income, and adjusting retained earnings or equity accounts.

Step-by-step explanation:

When a parent company has unconfirmed profits in its beginning inventory, an elimination journal entry is necessary in the consolidated financial statements to correct for intercompany profit that has not been realized outside the economic entity. This unconfirmed profit must be eliminated to prevent overstatement of assets and income. The specific working paper elimination entry would typically involve:

• Debiting an inventory account to remove the portion of the beginning inventory that contains the unconfirmed profit.
• Crediting a revenue or income account to reverse out the impact of the unconfirmed profit on the parent's earnings.
• Adjusting the retained earnings or equity accounts to reflect the correction if the profit affected prior periods.

It is important to make such adjustments to report the true economic condition of the consolidated entity.