Question

Piemon Company routinely receives goods from its 80%-owned subsidiary, Siemon Corporation. In 20X4, Siemon sold merchandise...

Piemon Company routinely receives goods from its 80%-owned subsidiary, Siemon Corporation. In 20X4, Siemon sold merchandise that cost $60,000 to Piemon for $90,000. Half of this merchandise remained in Piemon's December 31, 20X4 inventory. This inventory was sold in 20X5. During 20X5, Siemon sold merchandise that cost $150,000 to Piemon for $200,000. One-fifth of the 20X5 merchandise inventory remained in Piemon's December 31, 20X5 inventory.

Selected income statement information for the two affiliates for the year 20X5 was as follows:

Piemon  Siemon

Sales revenue 500,000 400,000

COGS 350,000 250,000

Oper. Exp. 50,000 70,000

Separate income 100,000 80,000

What amount of unrealized profit was in Piemon Company's inventory at the end of 20X5?

Select one:

a. $10,000

b. $25,000

c. $50,000

d. $40,000

e. $8,000

Business   Accounting   
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Homework Answers

Answer #1

a. $10,000

Explanation:
1. The inventory sold by Siemon to Piemon company in the year 2014 is completely sold in the year 2015. So, there will be no unrealized profir for goods sold during the year 2014 on Dec 31 2015.

2. Unrealised profit will be calculated for intercompany transfers between holding and subsidary and remains unsold in the purchasing company inventory at the time of consolidation. If the inventory is sold to third party there will be no unrealised profit  

   Profit margin on goods sold during 2015 = (50,000 / 2,00,000)*100

= 25%

1/5th of goods sold in 2015 remains unsold in piemon inventory = $2,00,000/5

= $40,000

Profit margin on Unsold inventory = $40,000*25%

= $10,000

Unrealised profit on Inventory = $10,000

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