Question

Xanadu Company, a 100% owned subsidiary of Richland Corporation, sells inventory to Robertson at a 30% profit on selling price. The following data are available pertaining to inter-company purchases by Robertson:

Inter-company sales			Unsold at year end (based on selling price)
2016:	$17,600		2016:	$3,200
2017:	$24,300		2017:	$5,700
2018:	$27,000		2018:	$4,800

Xanadu’s profit numbers were $113,000, $204,000 and $225,600 for 2016, 2017, and 2018, respectively. Richland received dividends from Xanadu of $21,000 for 2016 and 2017, and $25,000 for 2018.

1.

What would be the net debit or credit to cost of goods sold on the 2017 consolidation worksheet?

a.   $24,300 credit

b. $23,550 credit

c.   $25,050 credit

d.   $    750 debit

Answer 1

Sales by Xanadu company to it's 100% owned subsidiary is of downstream nature since here the sale is from Parent Company to Subsidiary Company.

For 2017, the Parent company has made a sales to $24,300 at a profit of 30% on sales price. Hence the Cost of goods sold for these goods were $24,300 * 70% = $17,010 and the profit element was $7,290(30%).

It should be noted that COGS is calculated as Opening Stock + Purchases - Closing stock

For Consolidated entity,

Opening Stock = $2,240 ($3200 * 70% since 30% profit is to be eliminated while consolidating)

Net Purchases = 0 (Since intercompany purchase and sale will be netted off)

Closing stock = $ 3,990 (5,700 * 70% since 30% profit is to be eliminated while consolidating)

Net Cost of Goods sold = $2,240 - $3,990

= -$1,750

Correct answer is debit $1,750.