Question 4. 4. Earth Company owns 100 percent of the capital stock of both Mars

Question

Question 4. 4. Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus. Based on the information, what amount should be eliminated from cost of goods sold in the combined income statement for 20X8? (Points : 1) $31,250 $25,000 $56,892 $6,250

Explanation / Answer

Solution:

The amount should be eliminated from cost of goods sold in the combined income statement for 20X8 is $6,250

Venus sold inventory to Mars Costing = $25,000

Purchase Amount of Inventory by Mars = $25,000 x 125% = $31,250

Profit earned by Venus by selling inventory to Mars = $31,250 -$25,000 = $6,250

Since Earth Company owns 100% of capital stock of Mars Corporation , the profit earned $6,250 by the Venus Corporation should be eliminated from the combined income statement for 2008.

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