Question

Jimmitz Inc. is a subsidiary of Krocker Gear. Jimmitz sells shoe accessories to Krocker at a 25% markup on cost. Information on these intercompany merchandise transactions is below:

Inventory balance on Krocker’s books, purchased from Jimmitz, January 1, 2020	$11,250
Inventory balance on Krocker’s books, purchased from Jimmitz, December 31, 2020	10,250
Total sales revenue recorded by Jimmitz on merchandise sales to Krocker in 2020	1,500,000

Required

a. Prepare the working paper eliminating entries related to these intercompany transactions at December 31, 2020.

Description		Debit	Credit
AnswerCost of goods soldInventoriesInvestment in KrockerRetained earnings, beg. - KrockerSales revenue		Answer	Answer
AnswerCost of goods soldInventoriesInvestment in KrockerRetained earnings, beg. - KrockerSales revenue		Answer	Answer
To eliminate the intercompany profit from Krocker's beg. Inventory.
AnswerCost of goods soldInventoriesInvestment in KrockerRetained earnings, beg. - KrockerSales revenue		Answer	Answer
AnswerCost of goods soldInventoriesInvestment in KrockerRetained earnings, beg. - KrockerSales revenue		Answer	Answer
To eliminate intercompany sales and purchases.
AnswerCost of goods soldInventoriesInvestment in KrockerRetained earnings, beg. - KrockerSales revenue		Answer	Answer
AnswerCost of goods soldInventoriesInvestment in KrockerRetained earnings, beg. - KrockerSales revenue		Answer	Answer
To eliminate the intercompany profit from Krocker’s ending inventory.

b. Krocker sold shoes containing Jimmitz’s shoe accessories during 2020.

What amount did Krocker and Jimmitz record as cost of goods sold for the shoe accessories in 2020?

$Answer

What amount should appear in consolidated cost of goods sold for these shoe accessories?

$Answer

Show how the eliminating entries in part a adjust Krocker’s cost of goods sold balance to the correct consolidated balance.

Account		Krocker Dr (Cr)	Jimmitz Dr (Cr)	Debit	Credit	Consolidated Balances Dr (Cr)
Cost of goods sold		$Answer	$Answer	Answer	Answer	$Answer
					Answer

Answer 1

SOLUTION

(A) Journal entries-

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
Dec.31,2020	Retained earning, Beginning	2,250
	Cost of goods sold [11,250 - (11,250/1.25)]		2,250
	(To eliminate the intercompany profit from Krocker's beg. Inventory)
Dec.31,2020	Sales revenue	1,500,000
	Cost of goods sold		1,500,000
	(To eliminate intercompany sales and purchases)
Dec.31,2020	Cost of goods sold	2,050
	Merchandise inventory [10,250 - (10,250/1.25)]		2,050
	(To eliminate the intercompany profit from Krocker’s ending inventory)

(B) Krocker's cost of shoe accessories sold = $11,250+1,500,000-10,250 = $1,501,000

The amount that should appear is the amount charged by Jimmitz, less the mark up =

= $1,501,000 / 1.25 = 1,200,800

Also Jimmitz would have recorded cost of goods sold of $1,500,000 / 1.25 = 1,200,000, when it sold the shoe accessories to Krocker.

The eliminating entry that transform the balances reported by krocker and Jimmitz into the correct consolidated balance -

$1,501,000 + 1,200,000 - 2,250 - 1,500,000 + 2,050 = $1,200,800