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

Answer rating: 100% (QA)

Step 1 Downstream vs Upstream transaction The downstream transaction occurs when the parent sold goo... View the full answer