Explain the Intra-Entity Gross Profit Deferred ($22,400)

Pot Co. holds 90% of the common stock of Skillet Co. During 2021, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000.Included in the amounts for Skillets sales were intra-entity gross profits related to Skillets intra-entity transfer of merchandise to Pot for $140,000. There were no intra-entity transfers from Pot to Skillet. Intra-entity transfers had the same markup as sales to outsiders. Pot still had 40% of the intra-entity gross profit remaining in ending inventory at the end of 2021. What are consolidated sales and cost of goods sold for 2021?

A) $1,400,000 and $952,000. B) $1,400,000 and $966,000. C) $1,540,000 and $1,078,000. D) $1,400,000 and $974,400. E) $1,540,000 and $1,092,000.

Solution: Consolidated Sales = Parents Sales ($1,120,000) + Subsidiarys Sales ($420,000) = $1,540,000 Intra-Entity Transfers ($140,000) = $1,400,000 Consolidated COGS = Parents COGS ($840,000) + Subsidiarys COGS ($252,000) Total Intra-Entity Gross Profit Remaining in Ending Inventory ($140,000) + Intra-Entity Gross Profit Deferred ($22,400) = $974,400