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: $$\begin{array} { | l | r | r | }
\hline & \underline { \text { Bates } } & \underline { \text { Sam } } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & \underline { ( 110,000 } & \underline { 55,000 } \
\hline \text { Cost of goods sold } & \$ \underline { 690,000 } & \$ \underline { 195,000 } \
\hline
\end{array}$$
- What is cost of sales on the consolidated statement of income for 20X6?
A)$687,000
B)$680,000
C)$685,600
D)$660,000

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: $$\begin{array} { | l | r | r | } 
\hline & \underline { \text { Bates } } & \underline { \text { Sam } } \
\hline \text { Beginning inventory } & \$ 100,000 & \$ 50,000 \
\hline \text { Purchases } & 700,000 & 200,000 \
\hline \text { Ending inventory } & \underline { ( 110,000 } & \underline { 55,000 } \
\hline \text { Cost of goods sold } & \$ \underline { 690,000 } & \$ \underline { 195,000 } \
\hline
\end{array}$$
- What is cost of sales on the consolidated statement of income for 20X6?
A)$687,000
B)$680,000
C)$685,600
D)$660,000

Quizplus · Accepted Answer

The cost of sales on the consolidated statement of income is calculated by adjusting for intercompany sales and unrealized profits in ending inventory. The intercompany sales from Sam to Bates were $200,000 with a 20% gross margin, meaning the cost to Sam was $160,000. Bates's ending inventory includes $15,000 of intercompany purchases, with an unrealized profit of $3,000 (20% of $15,000). The consolidated cost of sales is Bates's cost of goods sold ($690,000) plus Sam's cost of goods sold ($195,000) minus intercompany sales ($200,000) plus the unrealized profit adjustment ($3,000), resulting in $680,000.

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