[Lighthaven]

Parker Corp. owns 80% of Smith Inc.’s common stock. During Year 1, Parker sold Smith $250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in Year 1. The following information pertains to Smith and Parker’s sales for Year 1:

Parker:

Sales $ 1,000,000

Cost of sales 400,000

Total $ 600,000

Smith:

Sales $ 700,000

Cost of sales $ 350,000

Total $ 350,000

What amount should Parker report as cost of sales in its Year 1 consolidated income statement?

a. $750,000

b. $680,000

c. $500,000

d. $430,000

Answer: $500,000 cost of sales in consolidated income statement.

Parker COGS $400,000

Smith COGS 350,000

750,000

Adjustment for intercompany sales (250,000)

Adjusted cost of sales $ 500,000

—-

I’m struggling a lot with these intercompany sales. I understand that we need to eliminate the $250,000 intercompany sales. But why is there now intercompany profit from COGS to eliminate as well? I thought since Smith sold all the inventory, there would be profit related to this as well? Or is the profit already tied into the $250,000? Any help would be great appreciated!

AUD - 83
REG - 81 (2x)
FAR - 78
BEC - 85

And that's all she wrote.

[sillyapplepie]

Parker's JE
DR. AR 250K
CR. REV 250K
DR. COGS 200K (hypothetical)
CR. INV 200K

Smith's JE
purchase from parker:
DR. INV 250K
CR. AP 250K

sell to customer:
DR. AR X
CR. REV X
DR. COGS 250K
CR. INV 250K

$250k inventory = $250k Smith's COGS
200k + 250k – 250k = 200k

Except for the question, its 400k and 350k for COGS because it mixes COGS from other transactions

FAR - n/a

REG - n/a

BEC - n/a

AUD - n/a

[Author]

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