Question

Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports sales of $906,000 and cost of goods sold of $679,500. For this same period, Bottom has sales of $319,000 and cost of goods sold of $207,350. During the current year, Bottom sold merchandise to Top for $138,000. The parent still possesses 35 percent of this inventory at the current year-end. Bottom had established the transfer price based on its normal gross profit rate. What are the consolidated sales and cost of goods sold?

Answer 1

Answer and Explanation:

The computation of the consolidated sales and cost of goods sold is shown below:

For consolidated sales

= Top reported sales + bottom reported sales  + inter entity sales

= $906,000 + $319,000 - $138,000

= $1,087,000

And the cost of goods sold is

= Top reported cost of goods sold + bottom reported cost of goods sold - intra entity sales + ending gross profit unrealized

= $679,500 + $207,350 - $138,000 + $16,095

= $764,945

The ending gross profit unrealized is come from

= {1 - ($207,350 ÷ $319,000) × $138,000} × 35%

= $16,095