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To get the ,000 down to the appropriate amount of ,000, we need a credit to inventory of ,000.

Still another alternative is to calculate the amount of profit that remains in ending inventory.

This means we should end the year with ,000 in ending inventory.

But, we have ,000 in ending inventory (0,000 cost to Company B minus 0,000 relieved from inventory for sales).

We also need to eliminate some or all of the cost of sales.

How much of the cost of sales depends on the profit amount and the amount of inventory remaining at the end of the year.

This information is also reported on the income statement of the parent company.

Remember that in a business combination, we are trying to eliminate any transactions between the parent and the subsidiary so that we only have transactions with 3rd parties left after our consolidating entries.One of the tricks to solving problems involving intercompany eliminations is to understand the entries that A and B would book in these cases. To determine the sales price, we need to divide the 0,000 cost by 60% (100%-40% margin).One of the other tricks is understanding the relationship between cost and margin percentage. This gives us a sales amount of 0,000 and an intercompany profit amount of ,000.We know Company A recorded ,000 of profit on the intercompany sale.Since 30% of the inventory remains with Company B, we can multiply the ,000 profit by 30% to see that inventory is overstated by ,000 of intercompany profit.

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