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,by what amount was unadjusted revenue overstated in the combined income statement for 2008?

Question

Quizplus · Accepted Answer

Since Mars purchased inventory from Venus at a price of 125% of Venus's cost, Mars paid $31,250 ($25,000 x 125%) for the inventory it purchased from Venus. However, when Mars sold this inventory to unrelated customers for $56,892, it recorded revenue of $56,892, without adjusting for the intercompany sale between Mars and Venus. Therefore, the unadjusted revenue was overstated by the amount of the intercompany sale, which is $31,250 ($56,892 - $25,000).

Earth Company Owns 100 Percent of the Capital Stock of Both