Chapter 8, Problem 8.27B.2P

To determine

Introduction:

In order to calculate the amount of cost of goods sold that should be reported in the 20X6 Consolidated Income Statement, the intercompany transactions should be adjusted.

If the inventory which exists at the beginning of the year includes the purchases from the subsidiary company and is sold, then the unrealized intercompany profit should be deducted from the cost of goods sold.

If the inventory purchased from the subsidiary company during the year is sold, then the unrealized intercompany profit on the goods resold should be deducted from the cost of goods sold. Also the cost of goods sold by the subsidiary to the parent should be deducted as the same amount would be reflected in the books of parent either as cost of goods sold or as the ending inventory.

The consolidated cost of goods sold can be calculated by making the above adjustments.

To Choose: The option that represents the cost of goods sold that should be reported in the Consolidated Income Statement.