 Hello and welcome to the session in which we would look at a consolidation financial statement problem that could appear on the CPA exam or you could see it in your advanced accounting course. Simply put we need to find out what is the profit for the consolidated financial statement for Adam Corp. Now as I mentioned this topic is covered on the CPA exam as well as advanced accounting. If you are a CPA candidate I strongly suggest you visit my website farhatlectures.com. I don't replace your CPA review course. Most likely you are taking a course if you are studying for the exam. However I can be a useful addition to your CPA review course. You cannot walk into the exam without knowing consolidation in depth. I can add 10 to 15 points by helping you understand consolidation from A to Z. Matter of fact I think I overdo it in consolidation. I have so many lectures that I overwhelm you with consolidation but the point is I can give you an alternative supplemental explanation that's going to go with your CPA review course that's going to help you understand the topic. If that's what you want to do please visit my website and subscribe. Your risk is one month of subscription. Your potential gain is passing the CPA exam and if not for anything take a look at my website to find out how well or not well your university doing on the CPA exam. Please take a look at my other courses which is advanced accounting. I do have a complete advanced accounting course. If you have not connected with me on LinkedIn please do so and take a look at my LinkedIn recommendation from people who actually passed the exam using my system like this recording share it connect with me on Instagram and Facebook. So let's take a look at this exercise that looks a little bit intimidating at face value. Once we look at it once you understand the material you will see it's not bad. Adam Corp owns 90% of Farhat common stock and 80% that of Maggie's common stock. The remaining shares of Farhat and Maggie are owned by various other investors. So the main owner is Adam. Farhat sells exclusively to Maggie. Maggie buy exclusively from Farhat and Maggie sells exclusively to unrelated companies and this is the data that we are giving. This is Farhat sales 130,000 cost of sales they have no beginning inventory they have no ending inventory. Whatever they produce they sold all of it Maggie sold 90,000 cost of sales is 65,000 no beginning inventory and they end up with 65,000 of ending inventory. So now let's take a look at what's happening here. So Farhat sells to Maggie and Maggie sells to unrelated party. Okay and the question is what is the profit for the consolidated financial statement as far as Adam is concerned? So this is what we are looking at. So again Maggie sells to unrelated which is outside party. Well what we have to do now we have to compute the consolidated figures and find out how much should Adam court include under financial statement. Well hopefully we know that any interrelated sales any interrelated costs will have to be eliminated. Well let's start by starting with this computation. We have Farhat sales plus Maggie sales equal to 220,000. We know that Farhat sells exclusively to Maggie therefore we have to take out Farhat sales when we consolidate because Farhat sales are interrelated sales therefore what's left is 90,000. So under the consolidated financial statement for Adam court only 90,000 simply put the 30,000 will not appear. Let's take a look at the cost of goods cost of sales 100,000 plus 65,165. Again we have to eliminate any interrelated cost of sales. What's interrelated cost of sales? Well we have to subtract 100,000. Here's what happened. We are Maggie's claiming 65,000 as her cost of sales but that's not really true that's not really true why not because the true cost of sales is the cost of sales for Farhat because Farhat sold it to Maggie which is related party then Maggie sold it to an outside party. What is the original cost of sales for Farhat? The original cost of sales is 100,000 not 65. So when we take 165 minus 50 that's going to keep us with 65 then we're going to have to go back and reduce the 65 to the original cost of sales of Farhat. The original cost of sales because look Farhat sold 130,000 to Maggie. Well 65 of that was sold and 65 remain an ending inventory. So really that 65, what Maggie considered cost of sales it's really 50 because we have to go with Farhat's cost of sales the original cost of sales. So the 65 cost of goods sold and this is the ending inventory it's really 50. Therefore we have to reduce an additional 15,000. Therefore cost of sales the consolidated cost of sales is only 50,000. Now we can compute the profit the profit is 90 is 90 minus 50 the profit is 90 minus 50 the profit is 40,000 so this is how much profit we have. Let's go a step further. What if I asked you what is the ending inventory on the consolidated financial statement? Well what's the ending inventory? The ending inventory is you would think well Maggie has 65,000 that's the only ending inventory. True remember 130,000 is what Maggie purchased from Farhat. 65 of it is gone because she sold it and remember the true cost of that 65 is only 50 which we account for that and what's left is 65 of ending inventory. That ending inventory is not truly 65. We have to reduce it by 15,000 so I could have asked you what is the ending inventory for the consolidated financial statement? The ending inventory is 15. Well let's the best way to do this is let's take a look at the journal entry that we'll have to complete because they could ask they could also ask you about the journal entry or they could simply ask you in a form of a simulation to input the journal entries for this transaction. First I have to debit sales for Farhat 130,000 remember that 130,000 sales it has to be gone. I have to debit sales. I have to credit cost of sales cost of goods sold for Farhat 130,000 that I have to do as well. I also have to eliminate reduce the inventory for Maggie this is for Farhat. I have to reduce the inventory for Maggie for Maggie's company. I have to reduce her inventory by 15,000 and I have to reduce the cost of goods sold for Maggie another 15,000 which is this 15,000 here another 15,000 and this will be the journal entry. Let's make sure debits 130 equal to credits 130. So they can ask you many questions about this problem. They could ask you what is the ending inventory? The ending inventory consolidated is 50. Here they ask you what is the profit. They could have also asked you to what will be a correct journal entry and they will give you several journal entries and one of them will be either debit sales Farhat, credit cost of sales Farhat, credit inventory Maggie, credit cost of sales Maggie 15,000. So they could ask you several questions about this. Anyhow, any way they ask the questions as long as you understand the concept, as long as you understand what you are being told, as long as you understand how to answer it you should be good to go. At the end of this recording I'm going to remind you again about farhatlectures.com. This is what I do. I explain the material in details to help you understand the concept. I explain the concept. I explain questions. I will give you multiple choice, true, false, exercises that deals with advanced accounting. Don't hesitate. Give me a chance. Again, your risk is one month of subscription and in the grand scheme of things you are investing one month of subscription for four years. That's what you are doing. If it works you keep it. You get charged again every month until you pass. If you think it was a bad idea you lost $30. You lost $30 to take your chance to find out whether I am a good investment for you. I think I am based on other performance, based on prior performance. Anyhow, stay safe, good luck and study hard.