Question

A parent sells merchandise to its subsidiary at a markup of 20% on cost. In the current year, the subsidiary had $120,000 in merchandise purchased from the parent in its beginning inventory. During the current year, the subsidiary paid the parent $720,000 for merchandise, and sold merchandise purchased from the parent to outside customers for $870,000. At year-end, the subsidiary has $180,000 in merchandise purchased from the parent in its ending inventory.

How do the consolidation working paper eliminating entries affect cost of goods sold?

	A.	net credit of $690,000
	B.	net credit of $720,000
	C.	net credit of $700,000
	D.	net credit of $710,000

Answer 1

Parent	20% on cost→	Subsidary
Opening inventory	1,20,000	Purchased from Parent
Purchases from parent	7,20,000
Sales	8,70,000
Closing Inventory	1,80,000

Opening Inventory	120000
Add:Purchases from parent	720000
Less: Closing Inventory	-180000
Cost of goods sold	660000

We need to eliminate the stock reserve arising due to inter company transfers
Opening Inventory	120000
Less:Stock Reserve	120000*20/120
	20000
Opening Inventory	100000
Purchases	720000
Less:Stock Reserve	720000*20/120
	120000
	600000
Closing Inventory	180000
	180000*20/120
	30000
	150000
Opening Inventory	100000
Add:Purchases from parent	600000
Less: Closing Inventory	-150000
Cost of goods sold	550000

The eliminating entries will include a reduction in sales revenue to remove intercompany sales.

           

Net credit to COGS     =          opening inventory purchased from parent+Purchases from parent excluding stock reserve

                                    100000+600000

                                         700000

Openinginventory and purchases are reduced in COGS since these are purchases from parent which is a sale to parent company.This is not a sale in view of company as a whole.Hence COGS needs to be reduced while consolidating parent company books

So the answer is C.Net credit of $ 7,00,000