Levi Ltd. owns 60% of the outstanding common shares of Modry Ltd. During 2013, sales from Modry to Levi were $200,000. Merchandise was priced to provide Modry with a gross margin of 20%. Levi's inventories contained $40,000 at December 31, 2012 and $15,000 at December 31, 2013 of merchandise purchased from Modry. Cost of goods sold for Levi and Modry for 2013 on their separate-entity income statements were as follows: $\begin{array}{|l|r|r|}
\hline& \text { Levi } & \text { Modry } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & (110,000) & (55,000) \
\hline \text { Cost of goods sold } & \$ 690,000 & \$ 195,000 \
\hline
\end{array}$ What is the balance of the inventory account on Levi's consolidated statement of financial position at December 31, 2013?
A)$162,000
B)$140,000
C)$160,000
D)$165,000

Question

Levi Ltd. owns 60% of the outstanding common shares of Modry Ltd. During 2013, sales from Modry to Levi were $200,000. Merchandise was priced to provide Modry with a gross margin of 20%. Levi's inventories contained $40,000 at December 31, 2012 and $15,000 at December 31, 2013 of merchandise purchased from Modry. Cost of goods sold for Levi and Modry for 2013 on their separate-entity income statements were as follows: $\begin{array}{|l|r|r|} 
\hline& \text { Levi } & \text { Modry } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & (110,000) & (55,000) \
\hline \text { Cost of goods sold } & \$ 690,000 & \$ 195,000 \
\hline
\end{array}$ What is the balance of the inventory account on Levi's consolidated statement of financial position at December 31, 2013?
A)$162,000
B)$140,000
C)$160,000
D)$165,000

Quizplus · Accepted Answer

The consolidated inventory balance is the sum of the separate entity inventory balances, plus the unrealized gross profit on intercompany sales. The unrealized gross profit is calculated as the difference between the sales price and the cost of goods sold on the intercompany sales. In this case, the sales price is $200,000 and the cost of goods sold is $160,000 (20% gross margin on $200,000). Therefore, the unrealized gross profit is $40,000. The consolidated inventory balance is therefore $160,000 (Levi's inventory balance) + $15,000 (Modry's inventory balance) + $40,000 (unrealized gross profit) = $162,000.

Levi Ltd Owns 60% of the Outstanding Common Shares of Modry