King Corp. owns 80% of Lee Corp's common stock. During October, Lee sold merchandise to King for $100,000. At December 31, one-half of the merchandise remained in King's inventory. For the year, gross profit percentages were 30% for King and 40% for Lee. The amount of unrealized intercompany profit ending inventory at December 31 that should be eliminated in consolidation is:

$20,000

Explanation:

The amount of intercompany profit that should be eliminated in consolidation is the profit that Lee would have gotten if King had been able to sell all of the merchandise.

The amount of inventory left at the end of the year is:

= 1/2 * 100,000

= $50,000

Lee's gross profit from that would have been:

= 40% * 50,000

= $20,000

The profit that should be eliminated is $20,000

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