Mallard Ltd

question 30

Multiple Choice

Mallard Ltd.acquired 75% of the outstanding common shares of Teal Ltd.at December 31,20X1 for $900,000.Mallard has recorded its investment using the cost method.At the end of 20X7,Mallard still had $40,000 of goods purchased from Teal in its inventory and Teal had $50,000 of goods purchased from Mallard in its inventory.Both companies had gross margins of 40% in their sales of goods to each other and both companies sold these goods in 20X8.What adjustment should be made for Mallard's 20X8 consolidated financial statements with respect to the goods purchased from Teal that were still in Mallard's opening inventory?

• A)Decrease cost of sales by $40,000;decrease opening retained earnings by $30,000,decrease opening non-controlling interest by $10,000
• B)Decrease cost of sales by $40,000;decrease opening retained earnings by $30,000;increase opening non-controlling interest by $10,000
• C)Decrease cost of sales by $40,000;decrease sales by $40,000
• D)No adjustment is required as the profits have been realized

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Definitions:

Productive Investment Projects

Initiatives undertaken by businesses or individuals that are expected to yield a return by increasing output or efficiency.

Uncertain Returns

The unpredictability associated with the outcome of an investment or the potential return on an investment.

Economic Profit

The difference between a firm’s total revenues and its total costs, including both explicit and implicit costs, reflecting the true profitability of the firm.

Accounting Profit

The financial gain calculated by subtracting total explicit costs from total revenue.