Question

(2) The consolidated income statement for POP Industries and its 75% Subsidiary, SAS at the end of 2019 was as follows: Consolidated sales $900,000 , Consolidated cost of Sales $500,000 Operating expenses $200,000, Noncontrolling interest share $25,000 ,and Controlling interest share $175,000. After preparing the consolidated income statement, the accountants discovered that POP had sold inventory that cost $75,000 to SAS for $95,000, and SAS had sold inventory that cost $40,000 to POP for $58,000. Half of the products from both transactions still remained in inventory at December 31, 2019. These intercompany sales transactions had not been properly eliminated in consolidation. Required: Prepare the consolidated income statement for POP and Subsidiary for 2019 after correcting these errors. (Support your answer with detailed Formulas, calculations and explanation)

Answer 1

An intercompany transfer is merely the internal movement of inventory, an event that creates no net change in the financial position of the business combination taken as a whole.

Thus, in producing consolidated financial statements, the recorded effects of these transfers are elim­inated so that consolidated statements reflect only transactions with outside parties.

For Example

assume that Company A acquired or produced this inventory at a cost of $50,000 and then sold it to Compnay B, an affiliated party, at the indicated $80,000 price. From a consolidated perspective, the inventory still has a historical cost of only $50,000.

However, Company B records now report it as an asset at the $80,000 transfer price. In addition, because of the markup, A has recorded a $30,000 gross profit as a result of this inter­company sale. Because the transaction did not occur with an outside party, recognition of this profit is not appropriate for the combination as a whole.

This Implies That ending inventory remains overstated by $30,000.

Gross profit is artificially overstated by this same amount.

Therefore to correct the financial Statements at year end

Entry

COGS Dr 30000$

To Inventory 30000$

Similarly in the given Case, Applyig The Elimination ruls

Half the stock has been sold and Half of the stock are remained . Therefore We need to post one entry at year end to nullify the intercompany Profit

COGS Dr 9000

To Inventory 9000