Roland Company acquired 100 percent of Garros Company's voting shares in 2007.During 2008,Garros purchased tennis equipment for $30,000 and sold them to Roland for $55,000.Roland continues to hold the items in inventory on December 31,2008.Sales for the two companies during 2008 totaled $655,000,and total cost of goods sold was $420,000.Which of the following observations will be true if no adjustment is made to eliminate the intercorporate sale when a consolidated income statement is prepared for 2008?

Question

Quizplus · Accepted Answer

The intercorporate sale between Garros and Roland needs to be eliminated in order to avoid double counting of revenue and expenses in the consolidated income statement. If this sale is not eliminated, it will result in an overstatement of sales by $30,000 and an understatement of cost of goods sold by $25,000. Therefore, the net income will be overstated by $25,000. Hence, the correct option is C.

Roland Company Acquired 100 Percent of Garros Company's Voting Shares