American Company (Parent) sold merchandise that cost $3000 to California Company

Question

American Company (Parent) sold merchandise that cost $3000 to California Company (subsidiary) for $3,600 during the year. At the end of the year, California Company's inventory included $1,200 of the merchandise purchased from American Company. What amount of gross profit on the merchandise originally sold from American Company to California Company will be recognized in the consolidated financial statements (i.e, will be included in consolidated income) at the end of the year? 39. a. so, none of the gross profit of intercompany merchandise should be included in consolidated income $200, the gross profit on ending inventory of intercompany merchandise. $400, the gross profit on the portion of intercompany merchandise that California Company sold to outsiders during the year. b. c. d. $600, all of the gross profit on intercompany sales of merchandise during the year

Explanation / Answer

Answer is C. $ 400, the gross profit on the portion of intercompany merchandise that California company sold to outsiders during the year.

Explanation:

Total Gross profits on the transaction (3600-3000): 600

Less: Unrealised profit on Ending inventory (600/3600*1200): 200

Gross Profit to be recognized: 400

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