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متابعة

Perez, Inc. owns 100% of Senior, Inc. During year 1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in year 1?

 For year1 consolidated financial statements,how should the summation of Perez and Senior incomestatement items be adjusted?

 

a. Sales and cost of goods sold should be reduced by theintercompany sales.

 

b. Sales and cost of goods sold should be reduced by% of the intercompany sales.

 

c. Net income should be reduced by% of the grossprofit on intercompany sales.

 

d. No adjustment is necessary.

 

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تم إضافة السؤال من قبل mohamed Hakim CMA CPA Candidate , Accounting Manager , Andersen saudi arabia
تاريخ النشر: 2015/10/19
mohamed Hakim CMA CPA Candidate
من قبل mohamed Hakim CMA CPA Candidate , Accounting Manager , Andersen saudi arabia

CPA Exam , question from Wiley book

Answer : (A)

When computing consolidated income, the objective

is to restate the accounts as if the intercompany transactions

had not occurred.

As a result of the intercompany sales, sales

and cost of goods sold are overstated and an eliminating entry

is needed to reduce these accounts by the entire amount of

the intercompany sales. Therefore,

 

answer (a) is correct. Answer

 

(b) is incorrect because sales and cost of goods sold

need to be reduced by the entire amount of the intercompany

sales in order to arrive at their proper consolidated amounts.

Answer (c) is incorrect because net income is not affected

by the intercompany sale. Sales and cost of goods sold are

overstated by the same amount; thus, net income is correct

for consolidated purposes. Answer (d) is incorrect because an

adjustment is necessary.

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Answer A is the right option . Eliminating  all transaction which  occurred  among parent company and it's subsidiary .