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: Your answer: D was incorrect. The correct answer was B) $2,800; $1,800; $360. [(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 Why is the COGS multiplied 10,000? shouldnt it be .4*.3*7,500?
I would think so too. Where is this question from?
No, the output is subtracted from both Rev and COGS so I look at it like $7500- $3000(Which is 30% of Rev)=$4500*.4=$1800
Even when consolidated, you have to (a) recognize the fact that 40% of their COGS has to be on your balance sheet (just as with all their other accounts). There is no correction for part of it coming from you (i.e. - the *0.7 part), because you don’t supply them with COGS! (b) recognize that some of the profit earned by the subsidiary actually represents a lowering COGS for you (since you’ve theoretically bought it at their COGS, not yours). This is the 10,000*0.3*0.4 reduction in COGS shown
parents Cogs is what subsidiay considers as Sales.
thanks folks, i prolly would have gotten this one wrong on the exam!
serf_dude Wrote: ------------------------------------------------------- > Even when consolidated, you have to > (a) recognize the fact that 40% of their COGS has > to be on your balance sheet (just as with all > their other accounts). There is no correction for > part of it coming from you (i.e. - the *0.7 part), > because you don’t supply them with COGS! > (b) recognize that some of the profit earned by > the subsidiary actually represents a lowering COGS > for you (since you’ve theoretically bought it at > their COGS, not yours). This is the 10,000*0.3*0.4 > reduction in COGS shown that’s a great explanation!