Question

tulip Co. owns 100% of Daisy Co.'s outstanding common stock. Tulip's cost of goods sold for the year totals $600,000, and Daisy's cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of incom

Answer 1

Answer:

Cost of goods sold to be reported in  consolidated financial statement = $1,000,000

Explanation:

Whenever there is 100% or more than 50% holding in a company, then equity method is followed under which all of the items are to be consolidated, but in case where there are inter transfers that is transfer from holding to subsidiary or vice-versa then such transactions, profit not realized is to be eliminated.

In case where inventory is transferred to subsidiary after adding profit by holding company, then in case if that inventory is sold to third party by year end then entire profit is recognized even the profit added by holding to cost of goods sold to subsidiary.

Where in case such inventory is not sold further by subsidiary to third party and is still held in the stock then such profit added on sale by holding to subsidiary is eliminated.

In our case the entire inventory is sold to third party by the year end.

Therefore, entire profit will be recognized and cost of goods sold to be shown in consolidated financial statements = $600,000 + $400,000 = $1,000,000.

Answer 2

Answer:

$900,000 should be reported as cost of goods sold in the consolidated statement of income.

Explanation:

Given here is that Daisy common stock are 100% owned by Tulip co , which means Daisy co is a 100% owned subsidiary of Tulip and while recording the cost of goods sold in the consolidated income statement , cost of goods sold of both company's are going to be recorded.

Cost of goods sold = $600,000 + $400,000

=$1000,000

But here we here there is also a situation of inter company profit and loss which means that this amount of $100,000 that Tulip sold to Daisy would be subtracted from the total cost of goods sold,

COST OF GOODS SOLD = $1000,000 - $100,000

                                          = $900,000