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126 Jarvis owns 30% of McLintock. During the year to 31 December 20X4 McLintock sold $2 million of goods to Jarvis, of which 40% were still held in inventory by Jarvis at the year end. McLintock applies a mark-up of 25% on all goods sold. What effect would the above transactions have on group inventory at 31 December 20X4?
A Debit group inventory $48,000 B Debit group inventory $160,000 C Credit group inventory $48,000 D No effect on group inventoryThe answer is given as :-
126 C (($2m × 40%) × 25 / 125) × 30% = $48,000 This adjustment is removing profit from inventory so it is a credit entry
Kindly confirm this answer is correct only.. Also please let me know the same is the applicable in the case of if it is a sale from jarvis to Mclintok
I believe that the answer should be “D” – no affect on group inventory
The necessary adjustment should be through Investment in Associate and Consolidated Retained earnings
Dr Consolidated Retained Earnings $48,000
Cr Investment in Associate $48,000And that would be the same answer if the sale were from Jarvis to McLintock
But you told me that the answer was C – was that your attempt or was that the official answer?
Hi Mr,
C is the official answer. I have just asked you the same question in the below post but it is closed.
Then i just want to make clear: in exam, if asked to consolidate, what should I do with 48,000$? ( CR group inventory or CR investment in associate?)
https://opentuition.com/topic/consolidation-of-associate-unrealized-profit-in-the-stock/
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