On January 1, 2011, Rocker Ltd

Multiple Choice

On January 1, 2011, Rocker Ltd. formed Smith Co., a 100% owned subsidiary. During 2014, Rocker sold Smith $100,000 in goods. The unrealized profit in Smith's inventories was $20,000 at December 31, 2013 and $25,000 at December 31, 2014. Ignoring income taxes, what adjustment should be made to the consolidated financial statements for the year ended December 31, 2014 to reflect the unrealized profit in Smith's ending inventory?

A) Retained earnings at the end of 2014 will be decreased by $25,000.
B) Inventory at December 31, 2014 will be increased by $25,000.
C) Cost of goods sold for 2014 will be decreased by $25,000.
D) Retained earnings at the end of 2014 will be decreased by $5,000.