Question

Exercise 6-8

Perkins Company owns 85% of Sheraton Company. Perkins Company sells merchandise to Sheraton Company at 20% above cost. During 2014 and 2015, such sales amounted to $454,680 and $475,200, respectively. At the end of each year, Sheraton Company had in its inventory one-third of the amount of goods purchased from Perkins during that year. Assume that the sales were upstream instead of downstream.

Prepare the workpaper entries necessary to eliminate the effects of the intercompany sales for 2014 and 2015. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

Summary of intercompany sales 2014
	Sales	Goods resold	Balance inventory
Intercompany sales	$454,680	$303,120	$151,560
Intercompany COGS	$378,900	$252,600	$126,300
	(454680/1.2)
Gross profit	$75,780	$50,520	$25,260
Journal entry to eliminate intercompany sales for 2014
General Journal	Debit	Credit
Sales revenue	$454,680
Cost of goods sold		$454,680
Journal entry to defer unrealized profit
General Journal	Debit	Credit
Cost of goods sold	$25,260
Inventory		$25,260
Summary of intercompany sales 2015
	Sales	Goods resold	Balance inventory
Intercompany sales	$475,200	$316,800	$158,400
Intercompany COGS	$396,000	$264,000	$132,000
	(475200/1.2)
Gross profit	$79,200	$52,800	$26,400
Journal entry to record gross profit realized of prior period
General Journal	Debit	Credit
Retained earnings	$25,260
Cost of goods sold		$25,260
Journal entry to eliminate intercompany sales for 2014
General Journal	Debit	Credit
Sales revenue	$475,200
Cost of goods sold		$475,200
Journal entry to defer unrealized profit
General Journal	Debit	Credit
Cost of goods sold	$26,400
Inventory		$26,400