Question

Explain the Intra-Entity Gross Profit Deferred ($22,400)

Pot Co. holds 90% of the common stock of Skillet Co. During 2021, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000.Included in the amounts for Skillet’s sales were intra-entity gross profits related to Skillet’s intra-entity transfer of merchandise to Pot for $140,000. There were no intra-entity transfers from Pot to Skillet. Intra-entity transfers had the same markup as sales to outsiders. Pot still had 40% of the intra-entity gross profit remaining in ending inventory at the end of 2021. What are consolidated sales and cost of goods sold for 2021?

A) $1,400,000 and $952,000. B) $1,400,000 and $966,000. C) $1,540,000 and $1,078,000. D) $1,400,000 and $974,400. E) $1,540,000 and $1,092,000.

Solution: Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000 – Intra-Entity Transfers ($140,000) = $1,400,000 Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) – Total Intra-Entity Gross Profit Remaining in Ending Inventory ($140,000) + Intra-Entity Gross Profit Deferred ($22,400) = $974,400

Answer 1

*any doubt please comment

Intra entity gross profit is eliminated for the inventory reported on the consolidated balance sheet for intra company transfers. Since Skillet has transferred goods to Pot at selling price, the gross profit included in the ending inventory as on consolidation date is eliminated.

Gross profit % of Skillet = (420,000- 252,000)/ 420,000 = 40%

Intra entity merchandise balance = 140,000 *40% = 56000

Profit included in the inventory =  56000 * 40% = 22400