Question

Senior Company owns 100 percent of the outstanding shares of Junior. During the current year, Senior sold inventory costing $90,000 to Junior for $100,000. Junior has resold all of this merchandise to outside parties by the last day of the year. For the year, Senior reported cost of goods sold of $600,000 and Junior reported cost of goods sold of $500,000. What is the total amount reported on the consolidated income statement for cost of goods sold?

Answer 1

Senior Company own 100% of the outstnadning shares of Junior. In the question, Senior Company has transfered inventory costing $90,000 to Junior for $100,000. We can say it is an downstream transaction where Holding company has doen the sale transaction with booking of some profit.

It should be noted that while making sale, Senior Company would book a sale of $100,000 for a cost of goods sold of $90,000. It must be noted that Senior company is holding an unrealized profit of $10,000 in form of increased sale.

While making purchase entry, Junior Company will record the purchase at $100,000.

While Consolidating, we can say we need to adjust sales by $10,000 since Senior company has booked an unrealized gain of $10,000. Additionally, Junior company has recorded an increased cost of $10,000. At the time of consolidation, This needs to be eliminated by passing an Jounrnal entry as follows:

Sales A/c Dr. ..................... $10,000

To Cost of Goods Sold A/c $10,000

Cost of Goods Sold for Consolidation Statement:

Cost of Good Solds for Senior= 600,000

Cost of Good Solds for Junior= 500,000

Less: Adjustmet= 10,000

Total Cost of Goods Sold= $1,090,000