Question

"Parent owns 75% of the outstanding voting stock of Sub. During 2013, Parent sold inventory priced at $1,000,000 to Sub, and Parent's profits on these sales amounted to $50,000.

All inventory sold by Parent to Sub was sold by Sub to outside customers during 2013.
Here is what Parent and Sub report for total sales, cost of goods sold, and ending inventory at December 31, 2013 (for total sales between Parent and Sub and to outside customers).
Parent's books-Inventory $300,000
Sales revenue $5,000,000
COGS $4,000,000
Sub's Books-Inventory $150,000
Sale Revenue $3,500,000
COGS $2,700,000.
At what amounts should the 2013 consolidated financial statements report these three balances?
Inventory, Sales revenue, & Cost of goods sold"

Answer 1

The parent company's $50,000 profit from selling inventory to its subsidiary must be eliminated during consolidation, reducing the subsidiary's reported COGS by the same amount for consolidated reporting purposes.

Step-by-step explanation:

The student's question is regarding the accounting treatment of inventory sales between a parent company and its subsidiary. When the Parent sold inventory worth $1,000,000 to Sub and made a profit of $50,000, this profit is considered an intercompany transaction profit and thus needs to be eliminated in the consolidation process, given that Parent owns 75% of Sub's outstanding voting stock. To calculate the elimination entry, we subtract Parent's profit on the sale from the reported figures.

The Cost of Goods Sold (COGS) at Sub will be reduced by the profit element because the inventory was marked up. Therefore, COGS reported in the consolidated financial statements should be $2,700,000 (the amount reported by Sub) minus the $50,000 profit included in the sale, resulting in a consolidated COGS of $2,650,000.

The calculation of the firm's accounting profit provided in your textbook corresponds to a different scenario and isn't directly applicable to the intercompany transaction scenario presented in the student's question.