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Hi,
Lexus has owns 60% of voting equity of Nexus. he following information relates to the results of Lexus and Nexus for the year.
Nexus Lexus
Revenue 350$ 150$
COS 200$ 60$
Gross profit =150$ =90$During the year, Nexus sold goods to Lexus for $50,000. Lexus still had 40% of these goods in inventory at the year end. Nexus uses a 25% mark up on all goods.
What were the consolidated sales and cost of sales of the Lexus group at the year end?Sales Cost Of Sales
A $500,000 $210,000
B $500,000 $214,000
C $450,000 $210,000
D $450,000 $214,000The answer is D.
Why $50,000 intra group sales should be subtracted from cost of sales?
and why unrealised profits $4,000 should be added to cost of sales?Lexus will have recorded a purchase of 50,000 in its accounts. However in the consolidated accounts we only want to show purchases from outside the group and so we need to subtract the 50,000 from the cost of sales.
The $4,000 unrealised profit is profit that Nexus will have recorded in its accounts, but has not been made by the group because the goods have not been sold outside the group. To remove that profit we increase the cost of sales.
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