The financial statements of Post Company and Stamp Company on December 31, Year 5, were as follows:
Question:
The financial statements of Post Company and Stamp Company on December 31, Year 5, were as follows:
BALANCE SHEETS | |||||
Assets | Post | Stamp | |||
Cash | $ | 50,000 | $ | 10,000 | |
Accounts receivable | 250,000 | 100,000 | |||
Inventories | 3,000,000 | 520,000 | |||
Equipment (net) | 6,150,000 | 2,500,000 | |||
Buildings (net) | 2,600,000 | 500,000 | |||
Investment in Stamp (at cost) | 850,000 | — | |||
$ | 12,900,000 | $ | 3,630,000 | ||
Liabilities and Shareholders’ Equity | |||||
Current liabilities | $ | 300,000 | $ | 170,000 | |
Long-term liabilities | 4,000,000 | 1,100,000 | |||
Common shares | 3,000,000 | 500,000 | |||
Retained earnings | 5,600,000 | 1,860,000 | |||
$ | 12,900,000 | $ | 3,630,000 | ||
STATEMENTS OF INCOME AND RETAINED EARNINGS | |||||
Post | Stamp | ||||
Sales revenue | $ | 3,500,000 | $ | 900,000 | |
Other revenues | 300,000 | 30,000 | |||
3,800,000 | 930,000 | ||||
Cost of goods sold | 1,700,000 | 330,000 | |||
Selling and administrative expenses | 300,000 | 100,000 | |||
Other expenses | 200,000 | 150,000 | |||
Income tax expense | 300,000 | 70,000 | |||
$ | 2,500,000 | $ | 650,000 | ||
Net income | 1,300,000 | 280,000 | |||
Retained earnings, beginning balance | $ | 4,500,000 | $ | 1,600,000 | |
5,800,000 | 18,800,000 | ||||
Dividends declared | 200,000 | 20,000 | |||
Retained earnings, ending balance | $ | 5,600,000 | $ | 1,860,000 | |
Additional Information
Post owns 70 percent of Stamp and carries its investment in Stamp on its books by the cost method.
During Year 4, Post sold Stamp $100,000 worth of merchandise, of which $60,000 was resold by Stamp in the year. During Year 5, Post had sales of $200,000 to Stamp, of which 40 percent was resold by Stamp. Intercompany sales are priced to provide Post with a gross profit of 30 percent of the sales price.
On December 31, Year 4, Post had in its inventories $150,000 of merchandise purchased from Stamp during Year 4. On December 31, Year 5, Post had in its ending inventories $100,000 of merchandise that had resulted from purchases of $350,000 from Stamp during Year 5. Intercompany sales are priced to provide Stamp with a gross profit of 60 percent of the sale price.
Both companies are taxed at 25 percent.
To calculate Post’s consolidated cost of goods sold, the first step is to add together the unadjusted totals from Post’s and Stamp’s separate-entity financial statements. What is the adjustment to this figure for unrealized profits in beginning inventory for the year ended December 31, Year 5?
Multiple Choice
–$102,000
–$96,000
–$76,500
–$6,000
The eliminations on the consolidated income statement for unrealized profit in ending inventory and the related adjustment to income tax expense are the same regardless of whether it is the parent or the subsidiary who is the selling company.
True
False
Financial Statement Analysis
ISBN: 978-0078110962
11th edition
Authors: K. R. Subramanyam, John Wild