On January 1, 20X3, Dwayne Ltd $\begin{array} { l l } { \text { Debit } } &&&&&&& { \text { Credit } } \\\end{array}$

question 3

Short Answer

On January 1, 20X3, Dwayne Ltd. formed Carlos Co., a 100% owned subsidiary. During 20X6, Dwayne sold Carlos $100,000 in goods. The unrealized profit in Carlos's inventories was $20,000 at December 31, 20X5, and $25,000 at December 31, 20X6.
-Ignoring income taxes, what accounts should Dwayne debit and credit by $20,000 in preparing its consolidated financial statements for the year ended December 31, 20X6, to reflect the unrealized profit in Carlos's beginning inventory? $\begin{array} { l l } { \text { Debit } } &&&&&&& { \text { Credit } } \\\end{array}$
A) $\begin{array} { l l } \text {Cost of sales } &&& \text { Inventory } \\\end{array}$
B) $\begin{array} { l l }\text { Inventcry } &&&& \text { Cost of Sales } \\\end{array}$
C) $\begin{array} { l l } \text {Retained earnings } & \text { Cost of sales } \\\end{array}$
D) $\begin{array} { l l } \text {Cost of sales } &&& \text { Tetained earnings }\end{array}$

---

Definitions:

Variable Costs

Costs that change in proportion to the level of activity or production volume.

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance premiums, remaining constant regardless of activity levels.

Break-Even Point

The juncture where the cumulative expenses equal total income, yielding neither a profit nor a loss.

Contribution Margin

The amount by which sales revenue exceeds variable costs of production, indicating how much revenue contributes towards covering fixed costs and generating profit.