A subsidiary made sales of inventory to its parent at a profit this year. The pa

Question

A subsidiary made sales of inventory to its parent at a profit this year. The parent, in turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The amount that should be reported as cost of goods sold in the consolidated income statement prepared for the year should be:

A. the amount reported as intercompany sales by the subsidiary.

B. the amount reported as intercompany sales by the subsidiary minus unrealized profit in the ending inventory of the parent.

C. the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the parent.

D. the amount reported as cost of goods sold by the parent.

Explanation / Answer

ANSWER

The amount that should be reported as cost of goods sold in the consolidated income statement prepared for the year should be Option C, i.e. the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the parent. The reason is that In consolidated statement cost of good sold is of the parent company less unrealised profit on closing stock of parent.

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