The 2017 ending inventory of Sarnia contains a profit of $40,000 on merchandise purchased from Canata....

The 2017 ending inventory of Sarnia contains a profit of $40,000 on merchandise purchased from Canata. Sarnia purchased a total of $230,000 from Canata in 2017. The 2017 opening inventory of Sarnia contained a profit of $15,000 on merchandise purchased from Canata. In 2016, Sarnia purchased a total of $125,000 from Canata. What are the eliminating entries for consolidation. How do I figure out for consolidation purposes.

Expert Solution

For the purpose of Consolidation, all intercompany transactions needs to be reversed. It means Purchase made by Sarnia is Sales made by Canata but when accounts are consolidated there is no effective transaction but only internal movement of inventory. Transactions with only third parties are effective and recognised in consolidated books.

(A) For the purpose consolidation, Sales made by Canata during 2017 needs to be reversed :

Sales A/c Dr $230,000

Cost of Goods Sold Cr $230,000

(Being adjustment entry to eliminate the effect of sales i.e. inter-party transfer of inventory/)

(B) From the perspective of consolidation of accounts, there is still inventory which is overstated by inter-party sales (Profit content of $40,000 in year end inventory).

Cost of Goods Sold Dr $40,000

Inventory (BS) Cr $40,000

(Being adjustment entry for profit component in year end inventory)

(C) As the opening inventory also have a profit component of $15,000 in opening balances of each entity (i.e. separate accounts of each party), it needs to be removed from opening balance. Though effect of this eliminated from current year closing inventory in consolidated accounts. The entry is as below:

Retained Earnings Dr $15,000

Cost of Goods Sold (Op Balance Inventory) Cr $ 15,000

(Being adjustment entry of overstated retained earnings in the opening inventory)

ekkarill92 answered 2 years ago

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