"Top Company holds 90 percent of Bottom Company’s common stock. In the current year, Top reports sales of $800,000 and cost of goods sold of $600,000. For this same period, Bottom has sales of $300,000 and cost of goods sold of $180,000. During the current year, Top sold merchandise to Bottom for $100,000. The subsidiary still possesses 40 percent of this inventory at the current year-end. Top had established the transfer price based on its normal gross profit rate. What are the consolidated sales and cost of goods sold?"

Consolidated cost of goods sold = Parent Balance + subsidiary balance + ending unrealized gross -intra-entity transfers - beginning unrealized gross profit

In the given question, we identify the individual parameters in the equation as follows:

Parent Balance = 600,000

Subsidiary Balance = 180,000

Intra-entity transfers = 100,000

Ending unrealized gross profit = Ending inventory of bottom company * gross profit of top company = (0.4 * 100,000) * ((800,000-600,000)/600,000 * 100% ) = 25% * 40,000 = 10,000

Putting all these values back in the consolidated costs of goods sold formula = 600,000 + 180,000-100,000 + 10,000 = $690,000

We now proceed to calculate the consolidated sales;

It refers to the total sales of a company and all its subsidiaries which are calculated on consolidated basis

Mathematically, consolidated sales = Parent Balance + Subsidiary Balance - Intra-entity transfers

= 800,000+ 300,000-100,000 = $1,000,000