Question

King Corp. owns 85% of Lee Corp's common stock. During October, Lee sold merchandise to King for $100,000. At December 31, one-half of the merchandise remained in King's inventory. For the year, gross profit as a percentage of sales was 24% for King and 31% for Lee. Calculate the elimination adjustment to net income available to controlling interest for the year the intercompany sale occurred. Use a negative sign to indicate a decrease; no sign to indicate an increase.

Answer 1

Sale price of goods=$100000

Goods remaining in inventory of King Corp.=50% of 100000=$50000

Gross profit margin earned by Lee on such sale to King Corp. = 31% on sales

Gross profit included in closing inventory of King Corp.=50000*31%=15500

Since such profit in included in closing inventory ok King, when consolidating financial statements closing inventory of King Corp. will be reduced by $15500 to $34500.

Further its Net Income will also be reducted by $15500

Thus elimination adjustment required to net income availabe to controlling interest is -15500.