Question

Downstream Intercompany Merchandise Transactions

Sketchy Shoes is a subsidiary of Pacific Brands. Pacific routinely sells merchandise to Sketchy at a 25% markup on cost. Information on intercompany merchandise transactions is below (in thousands):

Inventory balance on Sketchy’s books, purchased from Pacific Brands, January 1, 2017	$ 6,250
Inventory balance on Sketchy’s books, purchased from Pacific Brands, December 31, 2017	6,625
Total sales revenue recorded by Pacific Brands on merchandise sales to Sketchy in 2017	250,000

Required

a. Prepare the working paper eliminating entries related to these intercompany transactions at December 31, 2017.

Consolidation Journal
Description		Debit	Credit
(I-1)	AnswerInvestment in SketchyCost of goods soldSales revenueInventoriesEquity in net income of Sketchy	Answer	Answer
	AnswerInvestment in SketchyCost of goods soldSales revenueInventoriesEquity in net income of Sketchy	Answer	Answer
To eliminate intercompany profit from Sketchy's beginning inventory
(I-2)	AnswerInvestment in SketchyCost of goods soldSales revenueInventoriesEquity in net income of Sketchy	Answer	Answer
	AnswerInvestment in SketchyCost of goods soldSales revenueInventoriesEquity in net income of Sketchy	Answer	Answer
To eliminate intercompany sales and purchases
(I-3)	AnswerInvestment in SketchyCost of goods soldSales revenueInventoriesEquity in net income of Sketchy	Answer	Answer
	AnswerInvestment in SketchyCost of goods soldSales revenueInventoriesEquity in net income of Sketchy	Answer	Answer
To eliminate intercompany profit from Sketchy's ending inventory

b. Assume Sketchy sold merchandise acquired from Pacific Brands for $300,000 during 2017. What amounts appear on the separate books of Pacific Brands and Sketchy Shoes, relating to the intercompany merchandise transactions, for sales revenue and cost of goods sold? What are consolidated sales and cost of goods sold? Show how the eliminating entries in part a above adjust the balances reported on the separate books of the two entities to the correct consolidated balances.

Remember to use negative signs with your credit balance answers in the Dr (Cr) columns.

Consolidation Working Paper
	Accounts Taken From Books		Eliminations
	Pacific Brands Dr (Cr)	Sketchy Shoes Dr (Cr)	Debit		Credit		Consolidated Balances Dr (Cr)
Sales revenue	Answer	Answer	(I-2)	Answer			Answer
Cost of goods sold	Answer	Answer	(I-3)	Answer	Answer	(I-2)	Answer
					Answer	(I-1)

Answer 1

a. The following are the entries to eliminate the intercompany dealings in purchases and sales:

b. Consolidated working paper is as follows:

Pacific Brands Cost of Goods sold = $ 250,000/1.25 = $ 200,000.

Sketchy Shoes Cost of Goods Sold:

Beginning inventory + Purchases - Ending Inventory

= $ 6,250 + $ 250,000 - $ 6,625

= $ 249,625.

Consolidated sales would eliminate the intercompany sales and purchases, so the sales would be for $300,000 made by Sketchy and the cost of goods sold would be amount of cost of goods sold by Pacific which can be arrived by deducting the beginning inventory markup. ( $249,625 / 125% ) $ 199,700.

Hope this is helpful!!