Question

9. 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

Answer:

$12,000

Explanation:

The amount of intercompany profit should be eliminated on the consolidated statements workpaper is the written down value of the merchandise minus the cost of the remaining merchandise in S Company's inventory. This can be calculated as follows:

The written down value of the merchandise = $92,000

Cost of the remaining merchandise = $240,000 × (1 ÷ 3) = $80,000

Intercompany profit = $92,000 - $80,000 = $12,000

Therefore, the amount of intercompany profit should be eliminated on the consolidated statements workpaper is $12,000.