Assume a parent company sells $1 million of inventory to its wholly owned subsidiary during 2018. The parents sales prices include a markup on cost equal to 33%. On December 31, 2018, the subsidiary still has $200,000 of merchandise that it purchased from the parent during 2018. This merchandise was completely sold by the subsidiary in 2019. In preparing the consolidated financial statements for the year ended December 31, 2018 the parent company makes consolidating entries to correct for the effects of the intercompany sales and to remove them from the consolidated financial statements. Why does the parent company, in preparing the consolidated financial statements for the year ended December 31, 2019, also make consolidating entries related to these intercompany inventory transactions from 2018?

A.Vertically integrative business combinations usually have recurring transactions between affiliated companies.

B.The subsidiarys ending inventory in 2018 is one of the factors that determines cost of sales in 2019.

C.The subsidiarys sales in 2019 is also overstated by the amount of intercompany sales from 2018.

D.The equity method mechanically double counts intercompany profits in ending inventory.