[Anonymous]

Hey yall,

Can anyone provide a clear explanation for this? Can’t quite wrap my head around it. Thanks!

Question 7 – Several years ago, Jumbo Corporation bought Shrimp Company. Shrimp was a supplier of merchandise for Jumbo and one of the primary reasons for this acquisition was so that Jumbo could save money on these purchases. In the current year, Jumbo reports cost of goods sold of $900,000 while Shrimp reports $500,000. Half of Shrimp’s sales were made to Jumbo for $400,000. As of the last day of the year, Jumbo still held 10 percent of these goods and planned to sell them early in the following year. What amount should Jumbo report as consolidated cost of goods sold?

A $1,015,000

B $1,040,000

C $1,165,000

D $1,190,000

[wr8280]

I believe the answer is B

Eliminate the intercompany transaction between the parent/sub:

The 400,000 sale to Jumbo ends up in Jumbo's COGS so take that number out of Jumbo's COGS (but add back the inventory because that number does not enter the COGS calculation i.e. it is still in inventory and was never expensed:

Pre-Consol COGS: 900,000

Less: Intercompany Sale (400,000)

Add: Inventory not used (and therefore not part of Jumbo's COGS) 40,000

Add: Shrimp's Pre-consol. COGS: 500,000

Consol. COGS = 1,040,000

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