Jolly Company owns 60 percent of the outstanding shares of Sad. During the current year, Jolly...

Jolly Company owns 60 percent of the outstanding shares of Sad. During the current year, Jolly sold inventory costing $90,000 to Sad for $100,000. Sad has already transferred cash in full payment. Sad still holds all of this inventory on the last day of the year. At the balance sheet date, Jolly has total current assets of $700,000 whereas Sad has total current assets of $400,000. Assume that there were no allocations established at the date of acquisition. What is the total amount reported on the consolidated balance sheet for current assets?

A) $1,000,000

B) $1,090,000

C) $1,094,000

D) $1,100,000

Expert Solution

Since Jolly company has 60% stake in Sad, Sad is subsidiary company of Jolly.

At the end of the year financial statements of both the companies will be consolidated. As a consequence any inter company owings and unrealised profit should be eliminated.In the given case, at the end of the year, Sad Ltd. is in possession of the stock sold by its Parent, Jolly. This stock will be accounted at cost (purchase price for Sad) in the stand alone financial statement of Sad which is $100000. however for consolidation, the accounting will be as follows:

Current Assets of Jolly on Balance sheet date: $700000

Current Assets of Sad: $400000

Cost of Stock: $90000

Sale Value: $100000

unrealised profit still in the books on the date of consolidation: $100000-$90000 = $10000

This unrealised profit has to be eliminated from the stock, (which is a part of current assets) so:

Current assets of Sad for consolidation, on balance sheet date $400000-$10000 (unrealised profit of $10000 is eliminated) = $390000

Total Current assets for Consolidation = $700000+$390000= $1090000 (Jolly and Sad respectively)

So The Answer is Option B)

ekkarill92 answered 1 year ago

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