Pink Corporation owns 80 percent of Sink Company's voting shares.During 20X4,Pink produced 60,000 smart phones at a cost of $62 each and sold 45,000 smart phones to Sink for $93 each.Sink sold 26,000 of the smart phones to unaffiliated companies for $128 each prior to December 31,20X4,and sold the remainder in early 20X5 to unaffiliated companies for $133 each.Both companies use the perpetual inventory systems.
-Based on the information given above,what amount of cost of goods must be eliminated from the consolidated income statement for 20X5?

Question

Quizplus · Accepted Answer

In 20X5, the only transactions that need to be eliminated are those related to the inventory that Sink sold, which was originally purchased from Pink in 20X4 but not sold until 20X5. Sink purchased 45,000 units but only sold 26,000 units in 20X4, leaving 19,000 units to be sold in 20X5. The cost of these units to Pink was $62 each, so the cost of goods that must be eliminated from the consolidated income statement for 20X5 is 19,000 units * $62 = $1,178,000. However, since Pink owns 80% of Sink, the elimination is only for the intercompany profit that pertains to Pink's ownership percentage. The selling price to Sink was $93 per unit, so the intercompany profit per unit is $93 - $62 = $31. The total intercompany profit on the 19,000 units is 19,000 * $31 = $589,000. This is the amount that must be eliminated from the consolidated income statement for 20X5 to correctly reflect the cost of goods sold from a consolidated perspective.

Pink Corporation Owns 80 Percent of Sink Company's Voting Shares