Pluto Company owns 100 percent of the capital stock of both Saturn Corporation and Sol Corporation.Saturn purchases merchandise inventory from Sol at 125 percent of Sol's cost.During 20X8,Sol sold inventory to Saturn that it had purchased for $25,000.Saturn sold all of this merchandise to unrelated customers for $56,892 during 20X8.In preparing combined financial statements for 20X8,Pluto's bookkeeper disregarded the common ownership of Saturn and Sol.
-Based on the information given above,what amount should be eliminated from cost of goods sold in the combined income statement for 20X8?

Question

Quizplus · Accepted Answer

The amount to be eliminated from the cost of goods sold in the combined income statement is $31,250. This is because Sol sold the inventory to Saturn at 125% of its cost ($25,000), which equals $31,250 ($25,000 * 125%). This intercompany sale should be eliminated in the consolidation process to avoid overstating revenues and cost of goods sold.

Pluto Company Owns 100 Percent of the Capital Stock of Both