Question

Perez owns 70% of Junior, Inc. During the year just ended, Perez sold goods to Junior for $474,533 with a 36% 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

- $4,74,533.

Explanation:

The Sales and Cost of Goods Sold should be reduced by amount of sales that has taken place inter-company i.e. by $4,74,533. This is becasue the goods sold by the holding company (Perez) to the subsidiary company (Junior) has been sold by the subsidiary (Junior) to customers. In such case, Junior would record sales and purchases during the year. Further, the holding company on standalone basis would also record sales to the subsidiary i.e. Junior.

When the consolidation of books takes place, the inter-company transaction involving sale and purchase of goods (which have been further sold by the subsidiary) stands knocked-off by the amount of sales effected. In other words, the sales and cost of goods sold would be reduced by amoount of sales since, the holding company (Perez) would show amount receivable from subsidiary (Junior) $4,74,533 and the subsidiary (Junior) would show the same amount as amount payable to the holding (Perez) $4,74,533.