Question

Punch Corporation acquired 80% ownership of Judy Corporation in 2017, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 20% of the book value of Judy. Punch purchased inventory from Judy for $75,000 on August 15, 2018, and resold 80% of the inventory to unaffiliated companies on December 2, 2018, for $100,000. Judy produced the inventory sold to Punch for $50,000. The companies had no other transactions during 2008.
1. Based on the information given above, what amount of cost of goods sold will be reported in the 2018 consolidated income statement?

Answer 1

Answer:

$71,000

Explanation:

The cost of sales in the consolidated income statement of punch corporation shall be calculated in the following manner:

Inventory purchased form Judy by Punch                                       $75,000                    

*unrealized profit on inventory purchased from Judy                      ($4,000)

((75,000-50,000)*20%)*80%

Cost of goods sold to be reported                                                    $71,000

* Since the Punch Corporation has sold the 80% of the inventory purchased from the Judy to the outside customers while the 20% of the inventory purchased from the Judy is still with the Punch corporation, therefore the unrealized profit earned by the Judy on the sale made to Punch in respect of 20% inventory shall be deducted for group purposes because from group point of view both the Punch and Judy are same entities.