Question

During the year ended December 31, 2019, Parent Company (the parent) sold merchandise to Subsidiary Corporation (a 90%-owned subsidiary) for a price of $32,340, at a markup of 32% of cost. Subsidiary sold merchandise acquired from Parent to outsider customers for $38,500 during 2019. Included in Subsidiary’s January 1, 2019, inventories were goods acquired from Parent at a billed price of $3,036 and included in Subsidiary’s December 31, 2019, inventories were goods acquired from Parent at a billed price of $2,310.

(i)         Prepare the working paper eliminating entries (in journal entry format) related to the intercompany sale of merchandise for the year ended December 31, 2019.

(ii)        Show how the working paper eliminating entry in part (i) adjusts cost of goods sold and ending inventory to the correct consolidated balances.

	Parent	Subsidiary	Adjustments & Eliminations		Consolidated
			Debits	Credits
Cost of goods sold
Inventory

(iii)       How (increase or decrease and the amount) is Parent’s 2019 equity in income of Subsidiary affected by the intercompany sale of merchandise?

Answer 1

ANSWER

(i).

ELIMINATION ENTRIES December 31,2019
Transaction	General Journal	Debit	Credit
a.	Sales	$       32,340
	Cost of goods sold		$       32,340
	(To eliminate intercompany sale in 2019)
b.	Retained Earnings, 1/1/2019	$             736
	Cost of Goods sold ($3,036 - (3036/132%)		$             736
	(To eliminate realized profit from upstream sale)
c.	Cost of goods Sold (2310-(2310/1.32))	$             560
	Inventory		$             560
	(To eliminate unrealized profit from downstream sale)

.

(ii).

	Adjustment and Elimination
	Debit	Credit	Consolidsated
Cost of goods sold	$                         560	$                   32,340
		$                         736	$             32,516
Inventory		$                         560	$                 -560

.

(iii).

Only elimination entry letter (b) has an effect in the parent's 2019 equity in income of Subsidiary. Since this came from an UPSTREAM SALE, the elimination entry is an adjustment to the net income of the subsidiary, Which then, will increase (by 736) the share of the Parent from the "adjusted" net income of the Subsidiary/

Elimination entry letter (a) has no effect on the reported net income of both the Parent and Subsidiary. Elimination entry letter (c) is an adjustment to the net income of the Parent since this came from a downstream sale.

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