Senior Inc.owns 85 percent of Junior Inc.During 20X8,Senior sold goods with a 25 percent gross profit to Junior.Junior sold all of these goods in 20X8.How should 20X8 consolidated income statement items be adjusted?

Question

Quizplus · Accepted Answer

When a parent company sells goods to a subsidiary, the intercompany sales are eliminated in the consolidation process because they have not yet been sold to an external party. Therefore, in the consolidated income statement, the sales and cost of goods sold should be reduced by the intercompany sales amount to avoid double-counting revenues and expenses. In this case, since Senior sold goods with a 25 percent gross profit to Junior, the cost of goods sold should be reduced by the full amount of the intercompany sales, while the sales should only be reduced by the intercompany price (the actual amount paid by Junior). Since none of the other answer options reflect this treatment, the best choice is D.