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