Chapter 6, Problem 6.1.4E

Multiple−Choice Questions on Intercompany Inventory Transfers [AICPA Adapted]
Select the correct answer a for each of the following questions:

Note: Items 3 and 4 are based on the following information:
Nolan owns 100 percent of the capital stock of both Twill Corporation and Webb Corporation. Twill purchases merchandise inventory from Webb at 140 percent of Webb’s cost. During 20X0. Webb sold merchandise that had cost it $40,000 to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 20X0. In preparing combined financial statements for 20X0. Nolan’s bookkeeper disregarded the common ownership of Twill and Webb.

4. By what amount was unadjusted revenue overstated in the combined income statement of 20X0?

1. $16,000
2. $40,000
3. $56,000
4. $81,200