Question

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb’s cost. During year 2, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during year 2. In preparing combined financial statements for year 2, Nolan’s bookkeeper disregarded the common ownership of Twill and Webb. By what amount was unadjusted revenue overstated in the combined income statement for year 2?A. $16,000B. $81,200C. $40,000D. $56,000

Answer 1

Answer: $56,000 is  unadjusted revenue overstated in the combined income statement for year 2.

Explanation:

Consolidated Cost of Goods Sold  = $40,000,

However, Twill realizes $56,000 ($40,000 × 140%) for a total of $96,000 as the cost of goods sold.

Thus,  $56,000[$96,000 – $40,000] should be eliminated from Cost of Goods Sold in the combined income statement for year 2.