Chapter 4, Problem 1UTI

To determine

To determinbe:.The type of errors that would be there on the consolidated income statement and balance sheet in case no adjustments were made on the consolidated worksheet.

Introduction: Consolidation is a process in which financial statements of subsidiary is merged with financial statements of the parent. In this process, effect of intercompany transactions are eliminated.

Explanation of Solution

Errors that would be there in the consolidated income statement and balance sheet in the absence of consolidation adjustments are listed as follows:

Unsold stock in the balance sheet would incude a profit of $3,000 $\left(\frac{12,000}{4}\right)$.

• Sales figures and cost of goods sold figure of the consolidated income statement would show inflated values. Sales figures would include sales made to subsidiary, as well as sales made to an outside party. Similarly, COGS would include cost to parent as well cost to subsidiary. This would result in decrease of gross profit percentage.

Therefore sales made by seller to buyer should be eliminated, COGS of the buyer should be eliminated, profit component of COGS remaining unsold is eliminated and profit included in the unsold inventory should be eliminated.