Top Company holds 90 percent of Bottom Company’s common stock. In the current ye

Question

Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports sales of $962,000 and cost of goods sold of $721,500. For this same period, Bottom has sales of $391,000 and cost of goods sold of $312,800. During the current year, Bottom sold merchandise to Top for $160,000. 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?

Explanation / Answer

Gross Profit = (Sales - Cost of Goods Sold) / Sales

= ($962000 - $721500)/$962000

= $240500 / $962000

= 0.25 or 25%

Unrealized gross Profit :-

= ($160000*35%)*25%

= $56000 * 25%

= $14000

Consolidated Sales :-

= T Company's Sales + B Company's Sales - Inter Entity Transaction

= $962000 + $391000 - $160000

= $1193000

Consolidated Cost of Goods Sold :-

= T Company's Cost of Goods Sold + B Company Cost of Goods Sold - Inter Entity Transaction + Unrealized Gross Profit

= $721500 + $312800 - $160000 + $14000

= $888300

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