Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation.Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost.During 2008,Venus sold inventory to Mars that it had purchased for $25,000.Mars sold all of this merchandise to unrelated customers for $56,892 during 2008.In preparing combined financial statements for 2008,Earth's bookkeeper disregarded the common ownership of Mars and Venus.
-Based on the information given above,what amount should be eliminated from cost of goods sold in the combined income statement for 2008?

Question

Quizplus · Accepted Answer

The amount to be eliminated from cost of goods sold is the intercompany profit, which is the markup on the inventory sold. Venus sold the inventory to Mars for $31,250 (125% of $25,000). The cost to Venus was $25,000, so the intercompany profit is $31,250 - $25,000 = $6,250. However, the question asks for the amount to be eliminated from cost of goods sold, which is the total intercompany sale amount of $31,250.

Earth Company Owns 100 Percent of the Capital Stock of Both