Wilson Ltd. owns 60% of the outstanding common shares of Miller Ltd. During 2013, sales from Miller to Wilson were $200,000. Merchandise was priced to provide Miller with a gross margin of 20%. Wilson' inventories contained $40,000 at December 31, 2012 and $15,000 at December 31, 2013 of merchandise purchased from Miller. Cost of goods sold for Wilson and Miller for 2013 on their separate-entity income statements were as follows: $\begin{array}{|l|r|r|}
\hline& \text { Wilson } & \text { Miller } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & (110,000) & (55,000) \
\hline \text { Cost of goods sold } & \$ 690,000 & \$ 195,000 \
\hline
\end{array}$ What is cost of goods sold on the consolidated income statement for 2013?
A)$687,000
B)$685,000
C)$660,000
D)$680,000

Question

Wilson Ltd. owns 60% of the outstanding common shares of Miller Ltd. During 2013, sales from Miller to Wilson were $200,000. Merchandise was priced to provide Miller with a gross margin of 20%. Wilson' inventories contained $40,000 at December 31, 2012 and $15,000 at December 31, 2013 of merchandise purchased from Miller. Cost of goods sold for Wilson and Miller for 2013 on their separate-entity income statements were as follows: $\begin{array}{|l|r|r|} 
\hline& \text { Wilson } & \text { Miller } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & (110,000) & (55,000) \
\hline \text { Cost of goods sold } & \$ 690,000 & \$ 195,000 \
\hline
\end{array}$ What is cost of goods sold on the consolidated income statement for 2013?
A)$687,000
B)$685,000
C)$660,000
D)$680,000

Quizplus · Accepted Answer

The consolidated cost of goods sold (COGS) is calculated by adjusting the COGS of Wilson and Miller for intercompany transactions. Since Wilson owns 60% of Miller, sales from Miller to Wilson need to be eliminated to avoid double counting. The gross margin on sales from Miller to Wilson is 20%, implying the cost is 80% of sales, or $160,000 ($200,000 * 80%). The ending inventory at Wilson that came from Miller decreased from $40,000 to $15,000, indicating that $25,000 of the goods purchased from Miller were sold. Therefore, the consolidated COGS is the sum of Wilson's and Miller's COGS minus the cost of goods sold by Miller to Wilson that were not yet sold by Wilson ($160,000 - $25,000), which equals $690,000 + $195,000 - $160,000 + $25,000 = $680,000.

Wilson Ltd What Is Cost of Goods Sold on the Consolidated Income