During the year ended 30 June 2022, a subsidiary entity sold inventories to a parent entity for $50 000. The inventories had previously cost the subsidiary entity $45 000. By 30 June 2022 the parent entity had sold 75% of the inventories to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at 30 June 2023 is:A) Sales reverue D r 50000 Cost of sales C r 48750 Irventories C r 1250 Deferred tax asset D r 375 Income tax expense C r 375 \begin{array} { l l c r } ext { Sales reverue } & \mathrm { Dr } & 50000 \ ext { Cost of sales } & \mathrm { Cr } & & 48750 \ ext { Irventories } & \mathrm { Cr } & & 1250 \ ext { Deferred tax asset } & \mathrm { Dr } & 375 & \ ext { Income tax expense } & \mathrm { Cr } & & 375\end{array} Sales reverue Cost of sales Irventories Deferred tax asset Income tax expense Dr Cr Cr Dr Cr 50000 375 48750 1250 375 B) Retained earnings D r 3500 Income tax expense D r 1500 Cost of sales C r 5000 \begin{array} { l l l } ext { Retained earnings } & \mathrm { Dr } & 3500 \ ext { Income tax expense } & \mathrm { Dr } & 1500 \ ext { Cost of sales } & \mathrm { Cr } & 5000\end{array} Retained earnings Income tax expense Cost of sales Dr Dr Cr 3500 1500 5000 C) Retained earrings D r 875 Incorne tax expense D r 375 Cost of sales C r 1250 \begin{array} { l l l } ext { Retained earrings } & \mathrm { Dr } & 875 \ ext { Incorne tax expense } & \mathrm { Dr } & 375 \ ext { Cost of sales } & \mathrm { Cr } & 1250\end{array} Retained earrings Incorne tax expense Cost of sales Dr Dr Cr 875 375 1250 D) Retained earnings D r 1250 Irventories C r 1250 Deferred tax asset D r 375 Retained earnings C r 375 \begin{array} { c l c c } ext { Retained earnings } & \mathrm { Dr } & 1250 \ ext { Irventories } & \mathrm { Cr } & 1250 \ ext { Deferred tax asset } & \mathrm { Dr } & 375 \ ext { Retained earnings } & \mathrm { Cr } & 375\end{array} Retained earnings Irventories Deferred tax asset Retained earnings Dr Cr Dr Cr 1250 1250 375 375

Question

During the year ended 30 June 2022, a subsidiary entity sold inventories to a parent entity for $50 000. The inventories had previously cost the subsidiary entity $45 000. By 30 June 2022 the parent entity had sold 75% of the inventories to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at 30 June 2023 is:A)     Sales reverue  D r 50000  Cost of sales  C r 48750  Irventories  C r 1250  Deferred tax asset  D r 375  Income tax expense  C r 375 \begin{array} { l l c r } 	ext { Sales reverue }  &  \mathrm { Dr }  &  50000 \	ext { Cost of sales }  &  \mathrm { Cr }  &   &  48750 \	ext { Irventories }  &  \mathrm { Cr }  &   &  1250 \	ext { Deferred tax asset }  &  \mathrm { Dr }  &  375  &  \	ext { Income tax expense }  &  \mathrm { Cr }  &   &  375\end{array}  Sales reverue   Cost of sales   Irventories   Deferred tax asset   Income tax expense  ​ Dr Cr Cr Dr Cr ​ 50000 375 ​ 48750 1250 375 ​ B)     Retained earnings  D r 3500  Income tax expense  D r 1500  Cost of sales  C r 5000 \begin{array} { l l l } 	ext { Retained earnings }  &  \mathrm { Dr }  &  3500 \	ext { Income tax expense }  &  \mathrm { Dr }  &  1500 \	ext { Cost of sales }  &  \mathrm { Cr }  & 5000\end{array}  Retained earnings   Income tax expense   Cost of sales  ​ Dr Dr Cr ​ 3500 1500 5000 ​ C)     Retained earrings  D r 875  Incorne tax expense  D r 375  Cost of sales  C r 1250 \begin{array} { l l l } 	ext { Retained earrings }  &  \mathrm { Dr }  &  875 \	ext { Incorne tax expense }  &  \mathrm { Dr }  &  375 \	ext { Cost of sales }  &  \mathrm { Cr }  & 1250\end{array}  Retained earrings   Incorne tax expense   Cost of sales  ​ Dr Dr Cr ​ 875 375 1250 ​ D)     Retained earnings  D r 1250  Irventories  C r 1250  Deferred tax asset  D r 375  Retained earnings  C r 375 \begin{array} { c l c c } 	ext { Retained earnings }  &  \mathrm { Dr }  &  1250 \	ext { Irventories }  &  \mathrm { Cr }  &  1250 \	ext { Deferred tax asset }  &  \mathrm { Dr }  &  375  \	ext { Retained earnings }  &  \mathrm { Cr }   &  375\end{array}  Retained earnings   Irventories   Deferred tax asset   Retained earnings  ​ Dr Cr Dr Cr ​ 1250 1250 375 375 ​

Erika J. Paredes · Accepted Answer

Final Answer : C, Explanation :  The correct adjustment involves eliminating the unrealized profit on the unsold inventory within the group. Since 75% of the inventory was sold outside the group, 25% remains, carrying an unrealized profit of $5,000 * 25% = $1,250. This profit needs to be eliminated from the consolidated financial statements. The tax effect of this intra-group profit ($1,250 * 30%) is $375, which reduces the income tax expense.

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