Question

P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of the current year, one-third of the merchandise remains in S Company's inventory. Applying the lower-of- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper?

Answer 1

Inter-company profit eliminated = $12,000

Step-by-step explanation:

Given:

Value of inventory = $300,000

Cost of inventory = $240,000

Computation of Profit recognized on sale profit

Profit recognized on sale = Value of inventory - Cost of inventory

Profit recognized on sale = $300,000 - $240,000

Profit recognized on sale = $60,000

Computation of Profit margin:

Profit margin = [60000/300000]×100 = 20%

Profit margin = 20% = 0.20

Computation of closing Inventory :

Closing Inventory = $300,000 (1/3)

Closing Inventory = $100,000

Profit during the year = $ 92,000

Value of inventory = $100,000 (1-0.20)= $80,000

Inter-company profit eliminated= $92,000 - $80,000 = $12,000