Solution manual advanced financial accounting, 8th edition by baker chap007

CHAPTER 7 INTERCOMPANY INVENTORY TRANSACTIONSANSWERS TO QUESTIONS Q7-1 All inventory transfers between related companies must be eliminated to avoid an overstatement of revenue and cost

CHAPTER 7 INTERCOMPANY INVENTORY TRANSACTIONS

ANSWERS TO QUESTIONS

Q7-1 All inventory transfers between related companies must be eliminated to avoid an

overstatement of revenue and cost of goods sold in the consolidated income statement Inaddition, when unrealized profits exist at the end of the period, the eliminations are needed toavoid overstating inventory and consolidated net income

Q7-2 An inventory transfer at cost results in an overstatement of sales and cost of goods

sold While net income is not affected, gross profit ratios and other financial statementanalysis may be substantially in error if appropriate eliminations are not made

Q7-3 An upstream sale occurs when the parent purchases items from one or more

subsidiaries A downstream sale occurs when the sale is made by the parent to one or moresubsidiaries Knowledge of the direction of sale is important when there are unrealized profits

so that the person preparing the consolidation workpaper will know whether to reduceconsolidated net income assigned to the controlling interest by the full amount of theunrealized profit (downstream) or reduce consolidated income assigned to the controllingand noncontrolling interests on a proportionate basis (upstream)

Q7-4 As in all cases, the total amount of the unrealized profit must be eliminated in

preparing the consolidated statements When the profits are on the parent company's books,consolidated net income and income assigned to the controlling interest are reduced by thefull amount of the unrealized profit

Q7-5 Consolidated net income is reduced by the full amount of the unrealized profits In the

upstream sale, the unrealized profits are apportioned between the parent companyshareholders and the noncontrolling shareholders Thus, consolidated net income assigned

to the controlling and noncontrolling interests is reduced by a pro rata portion of theunrealized profits

Q7-6 Income assigned to the noncontrolling interest is affected when unrealized profits are

recorded on the subsidiary's books as a result of an upstream sale A downstream saleshould have no effect on the income assigned to noncontrolling interest because the profitsare on the books of the parent

Q7-7 The basic eliminating entry needed when the item is resold before the end of the

period is:

The debit to sales is based on the intercorporate sale price This means that only therevenue recorded by the company ultimately selling to the nonaffiliate is to be included in the

Q7-8 The basic eliminating entry needed when one or more of the items are not resold

before the end of the period is:

Q7-9 Cost of goods sold is reported by the consolidated entity when inventory is sold to an

external party The amount reported as cost of goods sold is based on the amount paid forthe inventory when it was produced or purchased from an external party If inventory hasbeen purchased by one company and sold to a related company, the cost of goods soldrecorded on the intercorporate sale must be eliminated

Q7-10 No adjustment to retained earnings is needed if the intercorporate sales have been

made at cost or if all intercorporate sales have been resold to an external party in the sameaccounting period If not all of the intercorporate sales have been resold by the end of theperiod, consolidated retained earnings must be reduced by the parent's proportionate share

of any unrealized profits

Q7-11 A proportionate share of the realized retained earnings of the subsidiary are assigned

to the noncontrolling interest Any unrealized profits on upstream sales are deductedproportionately from the amount assigned to the noncontrolling interest and consolidatedretained earnings Unrealized profits on downstream sales are deducted entirely from theretained earnings assigned to the consolidated entity

Q7-12 When inventory profits from a prior period intercompany transfer are realized in the

current period, the profit is added to consolidated net income and to the income assigned tothe shareholders of the company that made the intercompany sale If the unrealized profitsarise from a downstream sale, income assigned to the controlling interest will increase by thefull amount of profit realized When the profits arise from an upstream sale, income assigned

to the controlling and noncontrolling interests will be increased proportionately in the periodthe profit is realized Thus, knowledge of whether the profits resulted from an upstream or adownstream sale is imperative in assigning consolidated net income to the appropriateshareholder group

Q7-13 Consolidated retained earnings must be reduced by the full amount of any unrealized

profit on the parent company books

Q7-14 Consolidated retained earnings must be reduced by the parent's proportionate share

of the unrealized profit on the subsidiary's books

Q7-15* Sales between subsidiaries are treated in the same manner as upstream sales.

Q7-16* When a company is acquired in a business combination the transactions occurring

before the combination generally are regarded as transactions with unrelated parties and noadjustments or eliminations are needed All transactions between the companies followingthe combination must be fully eliminated

SOLUTIONS TO CASES

C7-1 Measuring Cost of Goods Sold

a While the rule covers only a part of the elimination needed, Charlie is correct in that thecost of goods sold recorded by the selling company must be eliminated to avoid overstatingthat caption in the consolidated income statement

b The rules will result in the proper consolidated totals if rule #1 is expanded to include adebit to sales and a credit to ending inventory for the amount of profit recorded by thecompany that sold to its affiliate

c The way in which the rule is stated makes it appear to be incorrect, but it is correct Therule is appropriate in that the cost of goods sold recorded by the purchasing affiliate is equal

to the cost of goods sold to the first owner plus the profit the first owner recorded on the sale.Eliminating these amounts therefore eliminates the appropriate amount of cost of goods sold

If an equal amount of sales is eliminated, the rule should result in proper consolidatedfinancial statement totals

d The employee would be forced to look at the books of the selling affiliate and determinethe difference between the intercorporate sale price and the price it paid to acquire orproduce the items If the items sold to affiliates are routinely produced and costs do notfluctuate greatly, it may be possible to use some form of gross profit ratio to estimate theamount of unrealized profit

C7-2 Inventory Values and Intercompany Transfers

MEMO

Water Products Corporation

From: , CPA

Re: Inventory Sale and Purchase of New Inventory

If Water Products holds only a small percent of the ownership of Plumbers Products andGrowinkle Manufacturing, it should have no difficulty in reporting the desired results Thiswould not be the case if the two companies are subsidiaries of Water Products

If both Plumbers Products and Growinkel are subsidiaries of Water Products, both the sale of

C7-2 (continued)

The consolidated income statement should include the same amount of income on theinventory sold to Plumbers Supply and resold during the year as would have been recorded ifWater Products had sold the inventory directly to the purchaser Any income recorded byWater Products on inventory not resold by Plumbers Supply must be eliminated

Similarly, the consolidated income statement should include the same amount of income onthe inventory purchased by Water Products and resold during the year as would have beenrecorded if Growinkle Manufacturing had sold the inventory directly to the purchaser Anyincome recorded by Growinkle Manufacturing on inventory not resold by Water Productsmust be eliminated

Consolidated net income may increase if Plumbers Supply is able to sell the inventory itpurchased from Water Products at a higher price than would have been received by WaterProducts or if it is able to sell a larger number of units The same can be said for theinventory purchased by Water Products from Growinkle Manufacturing It is important torecognize that the transfer of inventory between Water Products and its subsidiaries does not

in itself generate income for the consolidated entity

An additional level of complexity may arise in this situation if Water Products uses the LIFOinventory method It might, for example, be forced to carry over its LIFO cost basis on the oldinventory sold to Plumbers Supply to the new inventory purchased from GrowinkleManufacturing since it was replaced within the accounting period

Primary citation:

ARB 51, Par 6

C7-3 Intercorporate Inventory Transfers

MEMO

Evert Corporation

From: , CPA

Re: Inventory Sale to Parent

This memo is prepared in response to your request for information on the appropriatetreatment of intercompany inventory transfers in consolidated financial statements Thespecific eliminating entries required in this case depend on the valuation assigned to theinventory at December 31, 20X2

Frankle Company sold inventory with a carrying value of $240,000 to Evert for $180,000 onDecember 20, 20X2 Since the exchange price was well below Frankle’s cost, considerationshould be given to whether the inventory should be reported at $180,000 or $240,000 in theconsolidated statements at December 31, 20X2, under the lower-of-cost-or-market rule.While the value of the inventory apparently had fallen below Frankle’s carrying value, theaccounting standards indicate no loss should be recognized when the evidence indicatesthat cost will be recovered with an approximately normal profit margin upon sale in the

ordinary course of business [ARB 43, Chapter 4, Par 9]

We are told the management of Frankle considered the drop in prices to be temporary andEvert was able to sell the inventory for $70,000 more than the original amount paid byFrankle It therefore seems appropriate for the consolidated entity to report the inventory atFrankle’s cost of $240,000 at December 31, 20X2

In preparing the consolidated statements at December 31, 20X2 and 20X3, the effects of the

intercompany transfer should be eliminated [ARB 51, Par 6]

The following eliminating entry is required at December 31, 20X2:

The above entry will increase the carrying value of the inventory to $240,000 Eliminatingsales of $180,000 and cost of goods sold of $240,000 will increase consolidated net income

by $60,000 and income assigned to the noncontrolling interest by $6,000 ($60,000 x 10).These changes will result in an increase in consolidated retained earnings and the amountassigned to the noncontrolling shareholders in the consolidated balance sheet by $54,000and $6,000, respectively

C7-3 (continued)

The following eliminating entry is required at December 31, 20X3:

The above entry will reduce consolidated net income by $60,000 and income assigned to thenoncontrolling interest by $6,000 ($60,000 x .10) The credits to retained earnings andnoncontrolling interest are needed to bring the beginning balances into agreement with thosereported at December 31, 20X2

No eliminations are required for balances reported at December 31, 20X3, because theinventory has been sold to a nonaffiliate prior to year-end

Primary citations:

ARB 43, CH 4, Par 9

ARB 51, Par 6

C7-4 Unrealized Inventory Profits

a When the amount of unrealized inventory profits on the books of the subsidiary at thebeginning of the period is greater than the amount at the end of the period, the incomeassigned to the noncontrolling interest for the period will exceed a pro rata portion of thereported net income of the subsidiary

b The subsidiary apparently had less unrealized inventory profit at the end of the periodthan it did at the start of the period In addition, the parent must have had more unrealizedprofit on its books at the end of the period than it did at the beginning The negative effect ofthe latter apparently offset the positive effect of the reduction in unrealized profits by thesubsidiary

c The most likely reason is that a substantial amount of the parent company sales wasmade to its subsidiaries and the cost of goods sold on those items was eliminated inpreparing the consolidated statements

d A loss was recorded by the seller on an intercompany sale of inventory to an affiliate andthe purchaser continues to hold the inventory

C7-5 Eliminating Inventory Transfers

a If no intercompany sales are eliminated, the income statement may include overstatedsales revenue and cost of goods sold The net impact on income will depend upon whetherthere were more unrealized profits at the beginning or end of the year If Ready Building doesnot hold total ownership of the subsidiaries, the amount of income assigned to noncontrollingshareholders is likely to be incorrect as well

Inventory, current assets and total assets, retained earnings, and stockholders' equity arelikely to be overstated if inventories are sold to affiliates at a profit If the companies payincome taxes on their individual earnings, the amount of income tax expense also will beoverstated in the period in which unrealized profits are reported and understated in theperiod in which the profits are realized

b Because profit margins vary considerably, the amount of unrealized profit may varyconsiderably if uneven amounts of product are purchased by affiliates from period to period.Ready Building needs to establish a formal system to monitor intercompany sales Perhapsthe best alternative would be to establish a separate series of accounts to be used solely forintercompany transfers Alternatively, it may be possible to use unique shipping containers forintercompany sales or to specifically mark the containers in some way to identify theintercompany shipments at the time of receipt The purchaser might then use a different type

of inventory tag or mark these units in some way when the product is received and placed ininventory Inventory count teams could then easily identify the product when inventories aretaken

c A number of factors might be considered The most important inventory system is the oneused by the company making the intercompany purchase When intercompany inventorypurchases are bunched at the end of the year, the amount of unrealized profit included inending inventory may be quite different under FIFO versus LIFO If intercompany purchasesare placed in a LIFO inventory base, inventories may be misstated for a period of yearsbefore the inventory is resold Eliminating entries must be made each of the years untilresale to avoid a misstatement of assets and equities In those cases where theintercompany purchases are in high volume and the inventory turns over very quickly, a smallamount of inventory left at the end of the period may be immaterial and of little concern.Typically, a parent will align inventory costing methods subsequent to a subsidiary acquisition

to avoid problems caused by differences in accounting for the same items or types of items

C7-5 (continued)

d It may be necessary to start by looking at intercorporate cash receipts and disbursements

to determine the extent of intercorporate sales One or more months might be selected andall vouchers examined to establish the level of intercorporate sales and the profit marginsrecorded on the sales For those products sold throughout the year, it may be possible toestimate for the year as a whole based on an examination of several months Once totalintercompany sales and profit margins have been estimated, the amount of unrealized profit

at year end should be estimated One approach would be to take a physical inventory of thespecific product types which have been identified and attempt to trace back using the productidentification numbers or shipping numbers to determine what portion of the inventory onhand was purchased from affiliates

C7-6 Intercompany Profits and Transfers of Inventory

a The intercompany transfers of Xerox (www.xerox.com) between segments are apparentlyrelatively insignificant because they are not reported in the notes to the consolidated financialstatements relating to segment reporting For consolidation purposes, all significantintercompany accounts and transactions are eliminated

b Exxon Mobil (www.exxonmobil.com) prices intercompany transfers at estimated marketprices The amount of intercompany transfers is large In the fiscal year ending December

31, 2006, Exxon Mobil reported eliminations of $368 billion of intersegment transfers, whichdoes not include intercompany transfers within segments This amount represents nearly 50percent of total reported segment sales For consolidation purposes, Exxon Mobil eliminatesthe effects of intercompany transactions

c Ford Motor Company (www.ford.com) intercompany transfers consist primarily of vehicles,parts, and components manufactured by the company and its subsidiaries, with a smalleramount of financial and other services included The amount of intercompany transfers issignificant, totaling almost $4 billion, but is relatively small in relation to sales to unaffiliatedcustomers The amount has been decreasing in recent years The effects of intercompanytransfers are eliminated in consolidation

Proportion of inventory unsold at year end

Unrealized profit at year end

E7-2 Multiple-Choice Questions on the Effects of Inventory Transfers

[AICPA Adapted]

Cost of goods sold reported by Small 700,000

Cost of goods sold reported by Park on

E7-4 Multiple-Choice Questions — Consolidated Balances

Income to Dresser’s noncontrolling

Unrealized profit ($45,000 x 20) (9,000)

E7-5 Multiple-Choice Questions — Consolidated Income Statement

1 a $20,000 = $30,000 x [($48,000 - $16,000) / $48,000]

3 a $7,000 = [($67,000 - $32,000) x 20]

E7-6 Realized Profit on Intercompany Sale

a Journal entries recorded by Nordway Corporation:

E7-7 Sale of Inventory to Subsidiary

a Journal entries recorded by Nordway Corporation:

E7-8 Inventory Transfer between Parent and Subsidiary

a Karlow Corporation reported cost of goods sold of $820,000 ($82 x 10,000 desks) and Draw Company reported cost of goods sold of $658,000 ($94 x 7,000 desks)

b Cost of goods sold for the consolidated entity is $574,000 ($82 x 7,000 desks)

E7-9 Income Statement Effects of Unrealized Profit

a Sale price to Holiday Bakery per bag ($900,000 / 100,000) $ 9.00 Profit per bag [$9.00 - ($9.00 / 1.5)] (3.00)

Bags sold by Holiday Bakery (100,000 - 20,000) x 80,000

Required Adjustment to Cost of Goods Sold:

Cost of goods sold — Holiday ($9.00 x 80,000 units) 720,000

$1,320,000 Consolidated cost of goods sold ($6.00 x 80,000 units) (480,000)

$550,000

Less: Income assigned to noncontrolling interest

($150,000 - $60,000 unrealized profit) x 40 (36,000)

Alternate computation:

Unrealized profits ($3.00 x 20,000 units) (60,000)

Ownership held by Holiday Bakery x .60

54,000

E7-10 Prior-Period Unrealized Inventory Profit

Cost of goods sold from inventory held, January 1, 20X9 $120,000

b Assuming the basic equity method is used by Holiday Bakery in

accounting for its investment in Farmco Products, the following

eliminating entry is needed:

$60,000 = 20,000 bags x $3.00

$550,000

Less: Income assigned to noncontrolling shareholders

Alternate computation:

Inventory profits realized in 20X9 60,000

Ownership held by Holiday Bakery x 60

186,000

E7-11 Computation of Consolidated Income Statement Data

$600,000 Intercompany sales by Prem Company in 20X5 $ 30,000

Intercompany sales by Cooper Company in 20X5 80,000 (110,000)

$370,000

Adjustment to cost of goods sold:

CGS charged by Prem on sale to Cooper $ 20,000

Unrealized profit on sale to Prem Company

E7-12 Sale of Inventory at a Loss

a Entries recorded by Trent Company

Sale of inventory to Gord Corporation

Record cost of goods sold

Entries recorded by Gord Corporation

Sale of inventory to nonaffiliates

Unrealized loss on intercorporate sale

Income to assigned to noncontrolling interest

E7-12 (continued)

d Eliminating entry, December 31, 20X8:

Computation of cost of goods sold to be eliminated

E7-13 Intercompany Sales

a Consolidated net income for 20X4:

$250,000

b Inventory balance, December 31, 20X5:

Inventory reported by Hollow Corporation $ 30,000

Unrealized profit on books of Surg

Corporation

($135,000 - $90,000) x ($30,000/$135,000) (10,000) $20,000

Unrealized profit on books of Hollow

Corporation

($280,000 - $140,000) x ($110,000/$280,000) (55,000) 55,000

c Consolidated cost of goods sold for 20X5:

CGS on sale of inventory on hand January 1, 20X5

d Income assigned to controlling interest:

$305,000 Add: Inventory profit of prior year realized in 20X5 15,000 Less: Unrealized inventory profit — Surg Corporation (10,000)

Unrealized inventory profit — Hollow Corporation (55,000)Income to noncontrolling interest

($85,000 + $15,000 - $10,000) x 30 (27,000)

E7-14 Consolidated Balance Sheet Workpaper

Eliminate investment balance

Consolidated Balance Sheet Workpaper

December 31, 20X8

Item Corp Co Debit Credit idated

(3) 10,000 200,000Buildings and Equipment

E7-15* Multiple Transfers between Affiliates

a Entries recorded by Klon Corporation

Sale of inventory to Brant Company

Record cost of goods sold

Entries recorded by Brant Company

Sale of inventory to Torkel Company

Record cost of goods sold

Entries recorded by Torkel Company

Sale of inventory to nonaffiliates

Record cost of goods sold

b Cost of goods sold for 20X8 should be reported as $60,000

[$90,000 x ($100,000 / $150,000)]

c Inventory at December 31, 20X8, should be reported at $40,000

[$60,000 x ($100,000 / $150,000)]

Computation of cost of goods sold to be eliminated

Cost of goods sold recorded by Torkel 90,000

Computation of reduction to carrying value of inventory

E7-16 Inventory Sales

a Journal entries recorded by Spice Company:

Record purchases from nonaffiliate

Record sale to Herb Corporation

Record cost of goods sold to Herb Corporation

Journal entries recorded by Herb Corporation:

Record purchases from Spice Company

Record sale of items to nonaffiliates

E7-17 Prior-Period Inventory Profits

a Eliminating entries:

Eliminate beginning inventory profit:

Unrealized profit, December 31, 20X9 (50,000)

Noncontrolling interest's share of ownership x .25 x 25 Income assigned to noncontrolling interest $ 85,000 $ 95,000

Eliminate beginning inventory profit.

Eliminate intercompany sale of inventory

Proportion held by noncontrolling interest x 40

P7-19 Unrealized Profit on Upstream Sales

20X2 20X3 20X4

Net income reported by Carroll 100,000 90,000 160,000

$250,000 $330,000 $460,000 Inventory profit, December 31, 20X2

Income to noncontrolling interest:

P7-20 Net Income of Consolidated Entity

$183,000

Amortization of differential

Less: Income to noncontrolling interest

($65,000 + $40,000 - $55,000 - $3,000) x 30 (14,100)

P7-21 Correction of Eliminating Entries

a Proportion of intercompany inventory purchases resold during 20X5:

Cost of inventory sold ($140,000 / 1.40) (100,000)

Proportion of intercompany sale held by

Proportion of intercompany purchases resold

by Bolger during 20X5 (1.00 - 30) .70

b Eliminating entries, December 31, 20X5:

Eliminate intercompany receivable/payable

Eliminate intercompany sale of inventory

P7-22 Incomplete Data

a Increase in fair value of buildings and equipment:

b Accumulated depreciation for consolidated entity:

Cumulative write-off of differential

c Amount paid by Lever to acquire ownership in Tropic:

Increase in value of buildings and equipment 40,000

d Investment in Tropic Company stock reported at December 31, 20X6:

Tropic's retained earnings reported December 31, 20X6 112,000

Proportion of ownership held by Lever x 75

Unamortized differential ($5,000 x 2 years) x 75 7,500

e Intercorporate sales of inventory in 20X6:

P7-22 (continued)

f Unrealized inventory profit, December 31, 20X6:

Unrealized inventory profit, December 31, 20X6 $ 4,000

g Eliminating entry to remove the effects of intercompany inventory

sales during 20X6:

h Unrealized inventory profit at January 1, 20X6:

Reduction of cost of goods sold for intercompany

Cost of goods sold reported in consolidated

Additional adjustment to cost of goods sold

due to unrealized profit in beginning inventory $ 9,000

i Accounts receivable reported by Lever at December 31, 20X6:

Adjustment for intercompany receivable/payable:

Accounts payable reported by Tropic 20,000

Accounts payable reported for consolidated

Adjustment for intercompany receivable/payable 17,000

P7-23 Eliminations for Upstream Sales

a Eliminating entries, December 31, 20X8:

Eliminate income from subsidiary

Assign income to noncontrolling interest

Eliminate beginning investment balance

Eliminate beginning inventory profit

$100,000 x ($105,000 / $150,000)

$135,000 Required elimination

Income assigned to noncontrolling interest

($40,000 + $20,000 - $15,000) x 20 (9,000)

c Noncontrolling interest, December 31, 20X8:

$335,000 Proportion of stock held by noncontrolling

P7-24 Multiple Inventory Transfers

a Consolidated net income for 20X8:

Unrealized profit, December 31, 20X8

($35,000 - $15,000) x ($7,000 / $35,000) (4,000) $ 76,000

Profit realized from 20X7

Unrealized profit, December 31, 20X8

($72,000 - $63,000) x ($12,000 / $72,000) (1,500) 38,000

Profit realized from 20X7

Unrealized profit, December 31, 20X8

($45,000 - $27,000) x ($15,000 / $45,000) (6,000) 17,000

b Inventory balance, December 31, 20X8:

c Income assigned to noncontrolling interest in 20X8:

Proportion of stock held by

Proportion of stock held by

noncontrolling interest .10 x 1,700

P7-25 Consolidation with Inventory Transfers and Other Comprehensive Income

a Balance in investment account at December 31, 20X5:

Proportionate share of Tall's net assets,

b Investment income for 20X5:

Proportion of ownership held by Priority x 90

c Income to noncontrolling interests for 20X5:

20X4 inventory profits realized in 20X5

20X5 unrealized inventory profits

Proportion of ownership held by noncontrolling

d Balance assigned to noncontrolling interest in consolidated balance

sheet:

Unrealized inventory profits at

Proportion of ownership held by noncontrolling

Net assets assigned to noncontrolling interest $ 143,600

P7-25 (continued)

e Inventory reported in consolidated balance sheet:

Less: Unrealized profit

$6,000 - [$6,000 x ($24,000 / $36,000)] (2,000) 98,000

f Consolidated net income for 20X5:

20X4 inventory profits realized in 20X5

Unrealized inventory profits on 20X5 sales

g Eliminating entries, December 31, 20X5

Eliminate income from subsidiary

Assign income to noncontrolling interest

P7-25 (continued)

E(3) Other Comprehensive Income from

Eliminate other comprehensive income

Additional Paid-In Capital — Tall Corporation 200,000

Eliminate beginning investment balance

Eliminate beginning inventory profit

of Tall Company

Eliminate beginning inventory profit

of Priority Corporation

Eliminate intercompany sale of inventory

by Priority Corporation

Eliminate intercompany sale of inventory

by Tall Company

P7-26 Multiple Inventory Transfers between Parent and Subsidiary

a Eliminating entries:

Eliminate beginning inventory profit

Eliminate intercompany sale of inventory

by Proud Company

Eliminate intercompany sale of inventory

by Slinky Company

b Computation of cost of goods sold for consolidated entity:

Inventory produced by Proud in 20X5

Cost of goods sold reported in

P7-27 Consolidation following Inventory Transactions

a Entries recorded by Bell on its investment in Troll:

Record dividends from Troll: $10,000 x 60

Record equity-method income: $30,000 x 60

b Eliminating entries, December 31, 20X2:

Eliminate income from subsidiary

Assign income to noncontrolling interest:

$11,680 = ($30,000 + $3,400 - $4,200) x 40

$67,200 = ($100,000 + $50,000 + $18,000) x 40

Eliminate beginning inventory profit of Troll Corporation: