A subsidiary sells merchandise to its parent at a markup of 25% on cost. In the

Question

A subsidiary sells merchandise to its parent at a markup of 25% on cost. In the current year, the parent had $75,000 in merchandise purchased from the subsidiary in its beginning inventory. During the current year, the parent paid $750,000 for merchandise from the subsidiary. By year-end, the parent has sold $700,000 of merchandise purchased from the subsidiary to outside customers for $900,000.

1.           

What is consolidated sales revenue for the year?

a.            $   900,000

b.            $1,650,000

c.            $1,500,000

d.            $   750,000

2.           

What is consolidated cost of goods sold for the year?

a.            $   900,000

b.            $1,300,000

c.            $   560,000

d.            $   750,000

3.

What is consolidated inventory at year-end?

a.            $125,000

b.            $100,000

c.            $ 25,000

d.            $200,000

Explanation / Answer

1. Consolidated Sales Revenue for the year is option “ a “ = $9,00,000(see working note 1)

2. Consolidated Cost of goods sold for the year is option “ c “ = $ 5,60,000(see working note 2)

3. Consolidated Inventory at year-end is option “ b “ = $ 1,00,00(see working note 3 )

Working Notes:

1.Consolidated Sales Revenue=Subsidiary co’s sales+ Parent Co’s Sales-Intra Group Sales

=$7,50,000+$ 9,00,000-$ 7,50,000= $ 9,00,000

2. Consolidated cost of sales=Subsidiary co’s cost of sales+Parent co’s cost of sales-Intra group purchases

=$ 560000+$700000-$7,00,000= $ 5,60,000

3. Consolidated Inventory at year end=We need to eliminate unrealized profit in the closing stock

=$125000-unrealised profit

=$ 125000-$25,000= $1,00,000

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