Please explain the Deferred Unrecognized Gross Profit ($14,000):

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 Pots sales were Pots sales of merchandise to Skillet for $140,000. There were no intra-entity transfers from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet still held 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, respectively 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 $1,022,000. 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 Inventory transfers ($140,000) + Deferred Unrecognized Gross Profit ($14,000) = $966,000

Why 14,000?