Asked by Tommy Grias on Jul 28, 2024
Verified
Jordan Ltd. acquired 80% of Cool Co. in 20X1. During 20X1, Cool sold inventory to Jordan. At the end of 20X2, the goods were still in Jordan's inventory. Jordan correctly eliminated the $10,000 of unrealized profits on its 20X2 consolidated financial statements and the goods were finally sold in 20X3. In preparing its 20X3 consolidated financial statements, what adjustments should be made with respect to the previously unrealized profit?
A) Increase cost of sales by $10,000, increase retained earnings by $8,000, and increase the non-controlling interest by $2,000.
B) Decrease cost of sales by $10,000, decrease retained earnings by $8,000, and decrease the non-controlling interest by $2,000.
C) Increase both cost of sales and retained earnings by $10,000.
D) No entry is required.
Unrealized Profits
Profits that have been earned but not yet realized through the sale of an asset; these profits exist on paper but have not resulted in actual cash inflow.
Consolidated Financial Statements
Financial statements that show the financial position, results of operations, and cash flows of a parent and its subsidiaries as a single economic entity.
- Calculate the adjustments needed for unrealized profits from intercompany transactions.
Verified Answer
MZ
Muhammad ZuhaibJul 29, 2024
Final Answer :
B
Explanation :
The previously unrealized profit of $10,000 needs to be recognized in 20X3 when the goods were actually sold. Since Jordan correctly eliminated the unrealized profit on its 20X2 consolidated financial statements, the adjustment in 20X3 should be to decrease cost of sales by $10,000 (to remove the elimination entry from 20X2), decrease retained earnings by $8,000 (80% of the unrealized profit), and decrease the non-controlling interest by $2,000 (20% of the unrealized profit). Therefore, B is the correct answer.
Learning Objectives
- Calculate the adjustments needed for unrealized profits from intercompany transactions.