#42 Intercompany Inventory Transactions

Question 1

Which one of the following will occur on consolidated financial statements if an intercompany inventory transaction is not eliminated?

1. An understatement of sales
2. An overstatement of sales
3. An understatement of purchases
4. An overstatement of accounts receivable

Answer 1

2. An overstatement of sales

Question 2

Pine Company acquired goods for resale from its manufacturing subsidiary, Strawco, at Strawco’s cost to manufacture of $12,000. Pine subsequently resold the goods to a nonaffiliate for $18,000. What is the amount of the elimination that will be needed as a result of the intercompany inventory transaction?

Answer 2

$12,000

Question 3

Tulip Co. owns 100% of Daisy Co.’s outstanding common stock. Tulip’s cost of goods sold for the year totals $600,000, and Daisy’s cost of goods sold totals $400,000. During the year, Tulip sold inventory costing $60,000 to Daisy for $100,000. By the end of the year, all transferred inventory was sold to third parties. What amount should be reported as cost of goods sold in the consolidated statement of income?

Answer 3

$900,000