# Why subtract proportion of sales to get COGS?

Company X owns 40% of company S and currently accounts for the investment using the equity method. Below are the 2002 balance sheets and income statements for companies X and S, in thousands of dollars. Company S has 200 in sales and Company X has 1000 in sales. Company S has 140 in COGS and Company X has 700 in COGS. Company X purchases 25% of the output of company S, and \$4,000 of the receivables of company S are from company X. If the investment is treated using the proportionate consolidation method, the COGS for company X will be: A) \$736,000. B) \$742,000. C) \$756,000. Answer: COGS will be increased by the proportionate share of the COGS of company S, less the proportionate share of sales of S made to company X, which means COGS is equal to 700,000 + (0.4 × 140,000) − (0.4 × 0.25 × 200,000) = 736,000. When calculating COGS, what does sales have anything to do with it? Why subtract (.4)(.25)(200000)?

look at the question. 25% of S’s output (Sub’s) is being repurchased by parent. So this is a case of When you need to get to the COGS of A – you are now reusing a portion of the Sales of B as your input.

look at the question. 25% of S’s output (Sub’s) is being repurchased by parent. So this is a case of When you need to get to the COGS of A – you are now reusing a portion of the Sales of B as your input. intercompany transactions are being eliminated.

oh ok so “output” is their COGS and all inventory? So they are subtracting 25% of the 40% of Company S whose output they’re repurchasing? Thanks cpk. I know I ask some dumb questions, but I always try to figure them out myself before asking you