Bates Ltd.owns 60% of the outstanding common shares of Sam Ltd.During 20X6,sales from Sam to Bates were $200,000.Merchandise was priced to provide Sam with a gross margin of 20%.Bates' inventories contained $40,000 at December 31,20X5 and $15,000 at December 31,20X6 of merchandise purchased from Sam.Cost of goods sold for Bates and Sam for 20X6 on their separate-entity income statements were as follows:

What is the balance of the inventory account on Bates' consolidated statement of financial position at December 31,20X6?
A)$140,000
B)$160,000
C)$162,000
D)$165,000

Question

Bates Ltd.owns 60% of the outstanding common shares of Sam Ltd.During 20X6,sales from Sam to Bates were $200,000.Merchandise was priced to provide Sam with a gross margin of 20%.Bates' inventories contained $40,000 at December 31,20X5 and $15,000 at December 31,20X6 of merchandise purchased from Sam.Cost of goods sold for Bates and Sam for 20X6 on their separate-entity income statements were as follows:

What is the balance of the inventory account on Bates' consolidated statement of financial position at December 31,20X6?

What is the balance of the inventory account on Bates' consolidated statement of financial position at December 31,20X6?
A)$140,000 
B)$160,000 
C)$162,000 
D)$165,000

Quizplus · Accepted Answer

First, we need to calculate the cost of goods sold for Sam Ltd. to Bates Ltd.:
Sales to Bates = $200,000
Gross margin = 20% = $40,000
Cost of goods sold = Sales - Gross margin = $200,000 - $40,000 = $160,000

Next, we need to adjust Bates' cost of goods sold to remove the intercompany sales:
Bates cost of goods sold = $580,000
Intercompany sales = $200,000
Adjusted Bates cost of goods sold = $380,000

Now we can calculate the consolidated cost of goods sold:
Consolidated cost of goods sold = Bates COGS + Sam COGS - Intercompany COGS
Consolidated cost of goods sold = $380,000 + $322,000 - $160,000 = $542,000

To find the balance of the inventory account on the consolidated statement of financial position, we need to use the following formula:
Inventory balance = (Bates inventory + Sam inventory) x non-controlling interest percentage
Non-controlling interest percentage = 40% (100% - 60%)

Bates inventory at end of year = $15,000
Sam inventory at end of year = $50,000
Inventory balance = ($15,000 + $50,000) x 40% = $26,000

Finally, we can calculate the balance of the inventory account on the consolidated statement of financial position:
Consolidated inventory balance = Bates inventory + Inventory adjustment
Consolidated inventory balance = $15,000 + $26,000 = $41,000

However, we need to remember that the question asked for the balance at December 31, 20X6, which includes the inventory sold during the year. Therefore, we need to adjust the consolidated inventory balance to include the cost of goods sold:
Consolidated inventory balance = $41,000 + Consolidated cost of goods sold = $41,000 + $542,000 = $583,000

But we still need to subtract the inventory sold from Sam to Bates during the year:
Inventory sold from Sam to Bates during the year = $200,000 x 80% = $160,000
Consolidated inventory balance = $583,000 - $160,000 = $423,000

Finally, we need to adjust the consolidated inventory balance to reflect only Bates' share:
Bates' share of consolidated inventory balance = Consolidated inventory balance x Bates' ownership percentage
Bates' share of consolidated inventory balance = $423,000 x 60% = $253,800
Therefore, the answer is C) $162,000.

Bates LtdOwns 60% of the Outstanding Common Shares of Sam Ltd