Question

Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of

$10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000
and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at
a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this
inventory.

Compute consolidated cost of goods sold.

Answer 1

$7,604,500

Step-by-step explanation:

Total cost of goods sold:

= Cost of goods sold of Patti Company + Cost of goods sold of Shannon Inc.

= $7,500,000 + $160,000

= $7,660,000

Consolidated cost of goods sold:

= Total cost of goods sold - Intra-Entity sales added in cost of goods sold of Shannon Inc. + Unrealized profit on ending inventory eliminated by adjusting cost of goods sold

= $7,660,000 - $60,000 + ($60,000 × 0.25) × 30%

= $7,660,000 - $60,000 + $4,500

= $7,604,500