During the current year, Pard Corp. sold goods to its 80%-owned subsidiary, Seed Corp. At December 31, one-half of these goods were included in Seed’s ending inventory. Reported selling expenses were $1.1 million and $400,000 for Pard and Seed, respectively. Pard’s selling expenses included $50,000 in freight-out costs for goods sold to Seed. What amount of selling expenses should be reported in Pard’s consolidated income statement?
A. $1,500,000
B. $1,450,000
C. $1,475,000
D. $1,480,000
Answer (B) is correct.
The effects of intraentity transactions should be eliminated from consolidated financial statements in their entirety regardless of the parent’s percentage of ownership. Consequently, consolidated selling expense is $1,450,000 ($1,100,000 + $400,000 – $50,000 of freight-out incurred on a sale by Pard to Seed). Seed’s inventory balance is not relevant to this calculation because selling expenses, including freight-out, are not inventoried.
Can someone explain this answer?
An expense for freight is to an outside party, no? If it is not inventoried it needs to be accounted for somehow.
They are essentially moving product in-house. It would normally be an inventoriable expense, because all warehouse expenses generally are overhead.
BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)
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