A subsidiary entity sold goods to its parent entity for $125 000. The inventories originally cost the subsidiary $100 000. At reporting date, the parent still held all of the inventories.

Which of the following adjustments must be included as part of the consolidation entry to eliminate this transaction?

Select one:

Cr Inventory $100 000

Dr Inventory $25 000

Dr Inventory $100 000

Cr Inventory $25 000

Correct Answer: 

Cr Inventory $25 000

Step-by-step explanation

The correct answer is credit inventory for $25,000.

The original amount of inventory is $100,000. It was sold to parent company at $125,000. There was markup on cost amounts to $25,000. However, it was stated on the problem that at the end of the period the inventories were still held by the parent company. So, under the consolidation process the inventory to be shown on the consolidated financial statements must be the original amount $100,000. But, the original amount was already credited during the sales to parent and the new amount $125,000 was debited. So, the new balance now of inventory is $125,000 and we have to make an adjustment to make it $100,000.

We need to deduct a $25,000 from $125,000 to make it $100,000. Because, the goal here is to present the original amount $100,000. Therefore, in adjusting journal entry we need to credit a $25,000 on inventory to reflect the original amount $100,000.