Question

Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports sales of $800,000 and cost of goods sold of $600,000. For this same period, Bottom has sales of $300,000 and cost of goods sold of $180,000. During the current year, Top sold merchandise to Bottom for $100,000. The subsidiary still possesses 40 percent of this inventory at the current year-end. Top had established the transfer price based on its normal gross profit rate. What are the consolidated sales and cost of goods sold?

a, $1,000,000 and $690,000.
b, $1,000,000 and $705,000.
c, $1,000,000 and $740,000.
d, $970,000 and $696,000.

Answer 1

Answer: Consolidated sales = $1,000,000

Cost of goods sold = $690,000

Step-by-step explanation:

Given :

Top company:

Sales = $800,000

Cost of goods sold = $600,000

Bottom Company:

Sales = $300,000

Cost of goods sold = $180,000

⇒ Top sold merchandise to Bottom for $100,000

∴ We'll compute the cost of goods sold as:

Cost of goods sold = (Parent balance + Subsidiary balance) - Intra - Entity transfer - Unrealized gross profit

∵ Unrealized gross profit = Inventory of Bottom × gross profit of Top

Unrealized gross profit
`= (0.40 * 10000) * ((800000 - 600000)/(800000)) \\= 10000`

⇒ Cost of goods sold = $600000 + $180000 - $100000 + $10000

⇒ Cost of goods sold = $690000

Now, We'll compute the consolidated sales:

Consolidated Sales = (Parent balance + Subsidiary balance) - Intra - Entity transfer

Consolidated Sales = $800000 + $300000 - $100000

Consolidated Sales = $1,000,000