Question

Pole Corporation owns 65 percent of Stick Company's stock. At the end of 20X3, Pole and Stick reported the following partial operating results and inventory balances:

	Pole			Stick
Total Sales	$	750,000			$	200,000
Sales to Stick Company		150,000
Sales to Pole Corporation						75,000
Net income						35,000
Operating income (excluding investment income from Stick):		73,000
Inventory on hand, December 31, 20X3, purchased from:
Stick Company		11,000
Pole Corporation						62,000

Pole regularly prices its products at cost plus a 40 percent markup for profit. Stick prices its sales at cost plus a 25 percent markup. The total sales reported by Pole and Stick include both intercompany sales and sales to nonaffiliates.

10) Based on the information given above, what amount of sales will be reported in the consolidated income statement for 20X3?

A) $725,000

B) $750,000

C) $875,000

D) $950,000

11) Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet for December 31, 20X3?

A) $8,800

B) $44,286

C) $53,086

D) $73,000

Please explain using clear math steps how to arrive at the bolded answers thank you

Answer 1

It should be noted that while consolidating Inter-company sales are not shown as sales since An entity cannot sell to itself.

Total Sales by Pole = $750,000

Total Sales by Stick = $200,000

Intercompany sales = $150,000 + $75,000 = $225,000

Sales to be recognised for Consolidated Entity = $750,000 + $200,000 - $225,000 = $725,000

Solution - 11:

It should be noted that Pole adds 40% mark-up over the cost while selling. It means that Closing Stock for Stick Corporation includes inter-company sales profit as well.

Closing stock for Stick corp(inclusive of profit from Pole) = $62,000

Closing stock at cost = $62,000 / (1+40%) = $44,286

Also It should be noted that Stick adds 25% mark-up over the cost while selling. It means that Closing Stock for Pole Corporation includes inter-company sales profit as well.

Closing stock for Pole corp(inclusive of profit from Stick ) = $11,000

Closing stock at cost = $62,000 / (1+25%) = $8,800

Total Closing stock at cost = $44,286 + $8,800 = $53,086