Question

Hand owns 90% of Finger and uses the equity method to account for its investment in Finger. In 2020, Finger sells inventory (cost of $60,000) to Hand for $80,000. Hand remains with 30% of this inventory at the end of 2020.

What is the consolidation worksheet entry required to be made at the end of 2020 for the unrealized gain ?

Answer 1

Finger company sold $80000 worth of goods to hand (having cost $60000) out of which 70% have been sold further but 30% is remaining in the stock.

So, journal entry shall be made to eliminate the profit portion in the 30% remaining stock only.

Calculations are as follows:

Unrealized gain in Inventory = Profit portion in total sales x Percentage of Inventory left at the end

= (Sales Price - Cost Price) x 30%

= ($80000 -$60000) x 30% = $20000 x 30%

Unrealized gain included in inventory = $6,000 - this has to be eliminated through a journal entry in the consolidated worksheet.

Journal Entry:

Debit A/c: Cost of Goods Sold/ Cost of Sales - $6000

Credit A/c: Inventory - $6000

Note: Here, the percentage of stake 90% is not relevant for the purpose of the above entry.

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