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's 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: $$\begin{array} { | l | r | r | }
\hline & \text { Bates } & \text { Sam } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & \underline { ( 110,000 } & \underline { 55,000 } \
\hline \text { Cost of goods sold } & \$ \underline { 690,000 } & \$ \underline { 195,000 } \
\hline
\end{array}$$ What is the balance of the inventory account on Bates's 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's 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: $$\begin{array} { | l | r | r | } 
\hline & \text { Bates } & \text { Sam } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & \underline { ( 110,000 } & \underline { 55,000 } \
\hline \text { Cost of goods sold } & \$ \underline { 690,000 } & \$ \underline { 195,000 } \
\hline
\end{array}$$ What is the balance of the inventory account on Bates's consolidated statement of financial position at December 31, 20X6?
A)$140,000
B)$160,000
C)$162,000
D)$165,000

Quizplus · Accepted Answer

To calculate the balance of the inventory account on Bates's consolidated statement for December 31, 20X6, we need to calculate the cost of merchandise purchased from Sam during the year by Bates.

Sales from Sam to Bates were $200,000, and Sam maintained a 20% gross margin on this merchandise, so the cost to Bates was $160,000 ($200,000 x 0.8).

The inventory account balance at December 31, 20X5, was $40,000, and the inventory of merchandise purchased from Sam was $15,000 at December 31, 20X6. So, the total inventory purchased during the year by Bates was $160,000 + $40,000 - $15,000 = $185,000.

Since Bates owns 60% of Sam, we can assume that 60% of the inventory balance at Sam (which is $45,000) belongs to Bates. Therefore, the balance of the inventory account on Bates's consolidated statement of financial position at December 31, 20X6 would be $185,000 - $45,000 = $140,000.

Therefore, the correct answer is choice C ($162,000).

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