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aimtobeacpa
Major Contributor

Joined: 10 Dec 2009
Online Status: Offline
Posts: 657

Posted: 21 Jul 2010 at 18:36 \| IP Logged

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp.

Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During 2004, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during 2004. In preparing combined financial statements for 2004, Nolan's bookkeeper disregarded the common ownership of Twill and Webb.

By what amount was unadjusted revenue overstated in the combined income statement for 2004?

	A. $16,000
	B. $40,000
	C. $56,000
	Since all the goods have been sold outside the consolidated entity income recognition is correct. However, sales and cost of goods sold have been recorded at two different points. The sale from Webb to Twill and the sale outside. To the consolidated entity Webb's cost (the original cost to the consolidated entity) is what is needed for cost of goods sold and Twill's sales (what it was sold for outside the consolidated entity) is needed for sales. This means that the sale from Webb to Twill and the cost of goods recorded by Twill need to be eliminated. Each of the these are $56,000 ($40,000 x 140%).
	D. $81,200

can someone explain the concept properly refering to this problem...i am getting confused...

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BEC-74,82(lost credit),78
FAR-67,80
AUD-75
REG-68,72,79

CPASTONE
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Joined: 12 Jul 2010
Online Status: Offline
Posts: 95

Posted: 21 Jul 2010 at 18:49 \| IP Logged

Since all the goods have been sold to outsiders. following entry would be passed to eliminate the effect of inter company sales.It will take care of inter company gain on the transaction which should be eliminated

Dr.Sale-Inter co. 51600
Cr. COGS 51600

This will eliminate any profit between the two inter company. The good thing is that it has been sold out outside so there is no inventory adjustment required to eliminate profit element.

I hope it helped.

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CPASTONE
FAR- 7/30/10 -pass
Audit-05/26/10 -pass
Reg-05/21/10- pass
Bec-08/31/10-pass

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