The California Wines owns 40% of a joint venture, Western Vineyards. Vineyard’s income statement for this period is as follows: Revenues $10,000 Less: cost of goods sold (COGS) 7,500 Gross profit $2,500 Less: selling and administrative expenses 500 Operating income $2,000 Less: interest expense 500 Earnings before taxes $1,500 Less tax 600 Net income $900 California Wines purchases 30% of the output of Vineyard. The amount of revenues, COGS, and net income of Vineyard to be included in the California Wine’s income statement under proportionate consolidation are, respectively: A) $2,800; $1,800; $360. B) $0; $0; $0. C) $4,000; $3,000; $360. Your answer: A was correct! [(0.4)($10,000)] − [(0.4)(0.3)($10,000)] = $2,800; [(0.4)($7,500)] − [(0.4)(0.3)($10,000)] = $1,800; (0.4)($900) = $360. Can anyone explain how they calculated COGS?
I think the transaction with Western created a COGS item for California which is on the revenue terms of Western ( NOT Western 's cost terms ). COGS of Transactions that are not related party= $7500 - 0.3*$10000 = $4500 Portion that belongs to California of unrelated transactions = 0.4* $4500 = $1800 Related transactions ( and sales and net income ) should not be counted into the consolidation items