Woody Ltd sold inventory items to its subsidiary Buzz Lightyear Ltd and had the following intercompany transactions:
Cost of inventory $300 000 sold for $375 000 for the year ended 30 June 2012.One third of the inventory items were sold by Buzz Lightyear Ltd to external parties before the financial year end 30 June 2012.
Cost of inventory $100 000 sold for $75 000 for the year ended 30 June 2013.Half of the inventory items were sold by Buzz Lightyear Ltd to external parties before the financial year end 30 June 2013.
Ignoring taxes,which of the following statements is correct with respect to this transaction only for the year ended 30 June 2013
A) Consolidated sales will decrease by $100 000.
B) Consolidated sales will increase by $275 000.
C) Consolidated profit will increase by $62 500.
D) Consolidated profit will increase by $12 000.

Question

Quizplus · Accepted Answer

Consolidated profit will increase by $62 500.The profit on the sale of the inventory is $75,000 - $100,000 = $25,000. Since half of the inventory was sold to external parties, the consolidated profit will increase by $25,000 / 2 = $12,500. In addition, the cost of goods sold will decrease by $100,000, resulting in a further increase in consolidated profit of $100,000 * (1 - tax rate). Assuming a tax rate of 30%, the consolidated profit will increase by $100,000 * (1 - 0.3) = $70,000. Therefore, the total increase in consolidated profit is $12,500 + $70,000 = $82,500.

Woody Ltd Sold Inventory Items to Its Subsidiary Buzz Lightyear