Use the following information to answer the question(s) below.

Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015.

During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity.

-If the sale referred to above was a downstream sale,by what amount must Inventory on the consolidated balance sheet be reduced to reflect the correct balance as of the end of 2014?
A)$3,000
B)$10,000
C)$14,000
D)$20,000

Question

Use the following information to answer the question(s) below.

Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015.

During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity.
 
-If the sale referred to above was a downstream sale,by what amount must Inventory on the consolidated balance sheet be reduced to reflect the correct balance as of the end of 2014?
A)$3,000 
B)$10,000 
C)$14,000 
D)$20,000

Quizplus · Accepted Answer

The sale was a downstream sale, which means that the inventory was sold to a subsidiary. Therefore, the inventory on the consolidated balance sheet must be reduced by the amount of the sale to reflect the correct balance as of the end of 2014. The amount of the sale was $10,000, so the inventory on the consolidated balance sheet must be reduced by $10,000.

Use the Following Information to Answer the Question(s) Below