Question

"A subsidiary sells merchandise to its parent at a markup of 25% on cost. In 2014, the parent paid $750,000 for merchandise received from the subsidiary. By year-end 2014, the parent has sold $500,000 of the merchandise to outside customers for $800,000, but still holds the other $250,000 in its ending inventory. Which statement is FALSE concerning the information reported on the 2014 consolidated financial statements?

a) The consolidated financial statements will include the intercompany sales at the original cost of $750,000.
b) The consolidated financial statements will reflect the ending inventory at the parent's cost of $750,000.
c) The consolidated financial statements will recognize the markup of 25% on cost for the ending inventory.
d) The consolidated financial statements will report the total sales of $500,000 including the intercompany sales."

Answer 1

The false statement is b) as the consolidated financial statements will not reflect the ending inventory at the parent's cost of $750,000 but rather at the cost of the remaining unsold inventory that was sold to the parent from the subsidiary, which is $250,000, adjusted for the intercompany profit elimination.

Step-by-step explanation:

The question pertains to the consolidation of financial statements where a subsidiary has sold merchandise to its parent company with a 25% markup on cost. We need to determine which statement is FALSE considering how transactions between the subsidiary and parent company should be reflected in the consolidated financial statements for the year 2014.

Statement a) implies that the intercompany sales would be included at the original cost of $750,000. This is true because in consolidated financial statements, intercompany transactions are eliminated to prevent double counting. Therefore, the sales from subsidiary to parent are not recognized at the sales amount but rather rolled back to the original cost.

Statement b) suggests that the ending inventory on the parent's balance sheet will display a cost of $750,000. This is false because only the unsold portion of inventory should appear on the balance sheet. The parent company purchased $750,000 worth of inventory but sold $500,000 worth to outside customers. This means only the remaining unsold inventory, purchased for $250,000, will be presented in the ending inventory at its cost, adjusted for the intercompany profit.

Statement c) addresses the markup of 25% and its reflection on the ending inventory on consolidated statements. Since intercompany profits need to be eliminated, the markup will be removed, and the ending inventory will be reported at the subsidiary's cost.

Statement d) discusses reporting the total sales of $500,000 on the consolidated statements, which is true. The sales made to outside customers will indeed be reported on the consolidated income statement, but intercompany sales would be eliminated.