Polly, Inc.owns 80% of Saffron, Inc.During 2014, Polly sold goods with a 40% gross profit to Saffron.Saffron sold all of these goods in 2014.For 2014 consolidated financial statements, how should the summation of Polly and Saffron income statement items be adjusted?

Question

Quizplus · Accepted Answer

When preparing consolidated financial statements, intercompany transactions need to be eliminated to avoid double counting of revenues and expenses. In this scenario, Polly sold goods to Saffron, so the sales and cost of goods sold reported by both companies need to be adjusted to eliminate this intercompany transaction. The adjustment should be the full amount of the intercompany sales, so choice A is the correct answer. Choices B and C are not appropriate because only the intercompany transaction needs to be eliminated, not 80% of it. Choice D is incorrect because an adjustment is necessary.