Use the following information to answer the question(s) below.

Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015.

During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity.

-If the sale referred to above was a downstream sale,the total sales revenue reported in the consolidated income statement for 2014 would be
A)$870,000.
B)$880,000.
C)$920,000.
D)$970,000.

Question

Use the following information to answer the question(s) below.

Paggle Corporation owns 80% of Spillway Inc.'s common stock that was purchased at its underlying book value. At the time of purchase, the book value and fair value of Spillway's net assets were equal. The two companies report the following information for 2014 and 2015.

During 2014, one company sold inventory to the other company for $50,000 which cost the transferor $40,000. As of the end of 2014, 30% of the inventory was unsold. In 2015, the remaining inventory was resold outside the consolidated entity.
 
-If the sale referred to above was a downstream sale,the total sales revenue reported in the consolidated income statement for 2014 would be
A)$870,000. 
B)$880,000. 
C)$920,000. 
D)$970,000.

Quizplus · Accepted Answer

For downstream sales, the revenue recognized should be only for the selling price to the external customer, and not for the intercompany profit. Therefore, the revenue recognized for the downstream sale in 2014 would be $100,000 ($500,000 - $400,000). 
Total sales revenue reported in the consolidated income statement for 2014 would be the summation of this revenue ($100,000) and the total revenue recognized from the parent company's sales and other subsidiaries' sales ($770,000), which would be $870,000. 
Therefore, option A is the correct answer.

Use the Following Information to Answer the Question(s) Below