Potter Company acquired 75 percent ownership of Snape Corporation in 20X5,at underlying book value.On that date,the fair value of the noncontrolling interest was equal to 25 percent of the book value of Snape Corporation.Potter purchased inventory from Snape for $150,000 on July 24,20X6,and resold 90 percent of the inventory to unaffiliated companies on November 11,20X6,for $160,000.Snape produced the inventory sold to Potter for $120,000.The companies had no other transactions during 20X6.
-Based on the information given above,what amount of cost of goods sold will be reported in the 20X6 consolidated income statement?

Question

Quizplus · Accepted Answer

Since Potter acquired 75% ownership, it implies that Snape's noncontrolling interest is 25%. Therefore, consolidating the companies means that 75% of Snape's income is that of Potter Company.
Cost of goods sold is calculated by adding beginning inventory to purchases and subtracting ending inventory. 
Beginning inventory = $0 (since there is no information about it)
Purchases from Snape Corporation = $150,000 
Therefore, cost of goods sold = beginning inventory + purchases - ending inventory 
We need to find out the ending inventory. 
Snape produced the inventory sold to Potter for $120,000. Since Potter purchased $150,000 worth of inventory and resold 90% of it for $160,000, we can calculate the remaining inventory based on the cost of goods sold equation.

Beginning inventory + purchases - ending inventory = cost of goods sold

$0 + $150,000 - ending inventory = cost of goods sold

75% of $120,000 (since Potter owns 75% of Snape) = $90,000

$0 + $150,000 - ending inventory = $90,000

Ending inventory = $60,000

Therefore, cost of goods sold = $0 + $150,000 - $60,000 = $90,000

So the option B ($108,000) is incorrect, and the correct answer is option B ($90,000).

Potter Company Acquired 75 Percent Ownership of Snape Corporation in 20X5,at