Port Corporation owns 80% of Sort Corporation. During 20X2, Port sold goods with
ID: 2403299 • Letter: P
Question
Port Corporation owns 80% of Sort Corporation. During 20X2, Port sold goods with a 40% gross profit to Sort. Sort sold all of these goods in 20X2. For 20X2 consolidated financial statements, how the summation of Port and Sort income statement items is adjusted?
Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
Sales and cost goods sold should be reduced by the intercompany sales
Net income should be reduced by 80% of the gross profit on intercompany sales.
No adjustment is necessary.
a.Sales and cost of goods sold should be reduced by 80% of the intercompany sales.
b.Sales and cost goods sold should be reduced by the intercompany sales
c.Net income should be reduced by 80% of the gross profit on intercompany sales.
No adjustment is necessary.
Explanation / Answer
Answer. b. sales and cost of goods sold should be reduced by intercompany sales.
Reason: as Port Corporation is a holding company of Sort corporation, the subsidiary company. And Port , the holding company has made profit of 40% but this is a intercompany profit. So the sales of port corporation and cost of goods sold of sort corporation should be reduced by intercompany sales to eliminate the inter company profit.