Question

A newly created subsidiary sold all of its inventory to its parent at a profit in its first year of existence. The parent, in turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The parent had no other sales during the year. The amount that should be reported as cost of goods sold in this year's consolidated income statement should be:

Answer 1

Answer: b. 80 percent of the amount reported as cost of goods sold by the subsidiary.

Explanation:

On the consolidated income statement, the amount that should be recorded for cost of goods sold is the amount that corresponds with the sale of the goods away from the company as a whole or rather sales to unaffiliated companies.

As a result of this, only 80% of the amount reported as cost of goods sold would be recorded in the consolidated income statement because it was 80% of the goods were sold to unaffiliated companies.