Under the Cost Method, the Workpaper Entry to Establish Reciprocity

question 8

Multiple Choice

Under the cost method, the workpaper entry to establish reciprocity:

• A) debits Retained Earnings - S Company.
• B) credits Retained Earnings - S Company.
• C) debits Retained Earnings - P Company.
• D) credits Retained Earnings - P Company.

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Definitions:

Lower-of-Cost

A principle requiring that inventory is recorded at the lower cost between its original purchase price and its current market price.

Market Inventory

The total quantity of goods available for sale in the market.

Overstated Inventory

An inventory valuation that is higher than the actual inventory level, which can misrepresent financial health.

Gross Profit

The difference between sales revenue and the cost of goods sold before deducting overheads, taxes, and interest.