Question

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting.
In the consolidation worksheet for 2018, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers?

a. Retained earnings.
b. Cost of goods sold.
c. Inventory.
d. Investment in Fisher Company.
e. Sales.

Answer 1

Answer:

Cost of goods sold.

Explanation:

Equity method in accounting is the process by which profits and losses of a company are allocated on the basis of investments made in it. Take for example a parent company has a 40% stake in a subsidiary. When the subsidiary makes profit or loss the parent company recieves a share.

The investor is usually referred to as an associate or affiliate and usually own 20-50% of voting shares in the company. Therefore the equity method is used and not the cost method.

To account for unrecognised intra-entity profit a credit will be passed to cost of goods sold.