Question

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012. 2012 2013 2014 Purchases by Posito $8,000 $12,000 $15,000 Ending inventory on Posito's books 1,200 4,000 3,000 Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends. 2012 2013 2014 Gargiulo's net income $70,000 $85,000 $94,000 Dividends paid by Gargiulo 10,000 10,000 15,000

4) For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2012/2013/2014 consolidation worksheet entry with regard to the unrealized gross profit of the prior year’s intra-entity transfer (if any) of merchandise

Answer 1

ANSWER:

As per the given Question

We will debit the cost of goods sold with the amount of unrealized profit on the intra-entity transfer. This adjustment is made with respect to the value of ending inventory, since, it includes the portion of profit that us yet to be realized.

The value of actual sale made by Gargiulo to Posito will get eliminated at the time of preparation of consolidated financial statements. Only the unrealized portion left in inventory will get accounted for. The formula for calculating the amount to be debited to cost of goods sold with regard to unrealized profit would be:

Amount = Inventory*Profit on Selling Price Percentage

__________

Solution:

Here, Inventory = 1,200 and Profit on Selling Price Percentage = 25%

Using these values in the above formula, we get,

Amount = 1,200*25% = $300 (which is Option A)

Thank you for Question.......kindly rate........it helps me a lot