Walsh Company Sells Inventory to Its Subsidiary, Fisher Company, at a Profit

question 4

Multiple Choice

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher.
In the consolidation worksheet for 2013, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

• A) Retained earnings.
• B) Cost of goods sold.
• C) Inventory.
• D) Investment in Fisher Company.
• E) Sales.

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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 output or sales, such as rent, salaries, and insurance premiums.

Operating Income

A measure of a company's profit generated from its core business operations, excluding deductions of interest and tax.

Operating Leverage

An indicator of the extent to which increases in sales revenue result in an increase in operating profit, showing the level of fixed expenses within a business's cost composition.