Pepper Corporation owns 75 percent of Salt Company's voting shares.During 20X8,Pepper produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to Salt for $90 each.Salt sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31,20X8,and sold the remainder in early 20X9 to unaffiliated companies for $130 each.Both companies use perpetual inventory systems.
-Based on the information given above,what amount of cost of goods sold must be reported in the consolidated income statement for 20X8?

Question

Quizplus · Accepted Answer

To calculate the cost of goods sold for the consolidated income statement, we need to first calculate Pepper Corporation's cost of goods sold (COGS) and then adjust it for the intercompany sale to Salt Company.

Pepper's COGS for the 50,000 chairs produced = 50,000 x $79 = $3,950,000

Since Pepper sold 35,000 chairs to Salt for $90 each, the total revenue from this sale is 35,000 x $90 = $3,150,000. However, we need to adjust this revenue for the intercompany sale, so we need to subtract the cost to Salt from the total revenue:

Cost of chairs to Salt = 35,000 x $79 = $2,765,000

Adjusted revenue for the intercompany sale = $3,150,000 - $2,765,000 = $385,000

Salt's COGS for the chairs sold to unaffiliated companies = 18,000 x $79 = $1,422,000

To calculate the consolidated COGS, we add Pepper's COGS to the adjusted revenue and subtract Salt's COGS:

Consolidated COGS = Pepper's COGS + Adjusted revenue - Salt's COGS 
Consolidated COGS = $3,950,000 + $385,000 - $1,422,000 = $2,913,000

Therefore, the answer is C) $1,422,000.

Pepper Corporation Owns 75 Percent of Salt Company's Voting Shares