Parent               Sub

Sales     2000K                1400K

COGS     800K                   700K

GP        1200K                  700K

same term as sale made to 3rd party therefore GP% = 60% (1200/2000)

SUB's cogs is 700K out of which 500k is from parent. The 500K includes a gain of 60% GP to parent which is not allowed on consolidation. we must get rid of it. But the whole 500K was not re-sold. 1/5 remain in inventory, there fore 4/5 (80%) must've cogs to sub which includes 60% GP.

Parent Interco Elimination:

Dr Sales  500K

   Cr   Cogs   200K (40%)

   CR Gross Profit 300K (60%)

Now parent's cogs is 800K - 200K = 600K  (200K is interco sales cogs eliminated)

Sub's Interco Elimination:

Subs cogs = 700K out which 500K was from parent at a 60% markup. But only 4/5 was sold and 1/5 remains in inventory

500K x 4/5 (80%) = 400K sold with the 60% markup

700K - 400K = 300K sold to outsides. There for it is legimate and dont eliminate.

400k COGS was interco with 40% actual cogs + 60% GP

400K x 40% = 160K actual Cogs for parent -sub sale

Parents Adjusted COGS    600K

SUB's adjusted COGS       160K

SUB Cogs to outsiders      300K

TOTAL                                    1060k