Question

Perez owns 56% of Junior, Inc. During the year just ended, Perez sold goods to Junior for $537,636 with a 23% gross profit. Junior sold all of these goods during the year. In its consolidated financial statements for the year, by what amount should the Sales and Cost of Goods Sold line be adjusted for this transaction? (use a plus sign for an increase and a minus sign for a decrease).

Answer 1

Answer

$ 537,636

Explanation:

• In this question, Perez sold goods to its subsidiary company of $ $537,636. This is known as inter-company sales.
• In such cases, Sales and COGS should be reduced by intercompany sales. So, Sales and COGS should be reduced by $ 537,636.
• The reason is simple. When we prepare consolidated financial statements, we consider both the companies as a single company and all the inter-company transactions are removed.
• Note that the Gross profit ratio given in question has no use in the answer.

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