Question

Parent Company owns a controlling share of Subsidiary company's common stock. During 2017 and 2018, Parent sold inventory to Subsidiary company. The sales and cost of sales information are detailed below. There were no intercompany sales prior to 2017. In both 2017 and 2018, Subsidiary sold 80% of the intercompany inventory purchased in that year. In 2018, all the beginning inventory was sold first.

Ownership Percentage 75%

2017 intercompany sales $550,000

2018 intercompany sales $470,000

2017 Cost of Goods Sold $350,000

2018 Cost of Goods Sold $310,000

A) Record all 2017 elimination entries necessary due to the inventory transactions.

B) Record all 2018 elimination entries necessary due to the inventory transactions.

I think I know the entries so far, but getting the numbers is what is tripping me up.

For 2017 entries:

Debit Sales, Credit COGS then Debit COGS Credit Inventory - Bal Sheet

And for 2018.... Debit Beg R/E and Credit COGS (and then Debit Sales Credit COGS and Debit COGS and Credit Inventory???)

A little confused here... I think because the wording is different than the questions my professor went over in the powerpoint. Any help is appreciated. Thanks in advance!

Answer 1

Please note that the parent company sold goods to its subsidiary. So for Parent company it will be sales and for subsidiary company it will be purchase. So elimination entries will be sales of parent company debit and purchase of subsidiary company credit for both the years. There will be no effect on COGS. Either COGS will be used to calculate profit percentage or markup percentage to eliminate the unrealized profit in the closing inventory of the goods held of parent company by subsidiary company.

For 2017:

Profit Percentage or Markup Percentage on sales = ($550000 - $350000)/$550000

                                                                                                =36.36%

1. Elimination Entry for Purchase and sale

Sales A/c              Debit     $550000

Purchase A/c     Credit    $550000

2. Elimination Entry for unrealized profit

Closing Inventory = $550000*20%

                                   = $110000

Unrealized Profit = $110000 * markup percentage

                                                = $110000 * 36.36%

                                                = $40000 (Rounded off to nearest)

               

Profit and Loss A/c          Debit     $40000

                Inventory A/c                    Credit    $40000

For 2018:

Profit Percentage or Markup Percentage on sales = ($470000 - $310000)/$470000

                                                                                                =34.04%

1. Elimination Entry for Purchase and sale

Sales A/c              Debit     $470000

Purchase A/c     Credit    $470000

2. Elimination Entry for unrealized profit

Closing Inventory = $470000*20%

                                   = $94000

Unrealized Profit = $94000 * markup percentage

                                                = $94000 * 34.04%

                                                = $32000 (Rounded off to nearest)

               

Profit and Loss A/c          Debit     $32000

                Inventory A/c                    Credit    $32000

Note: It is assumed that the company is following FIFO basis and hence the elimination effect on opening stock will not be applicable. Please feel free to ask any clarity or query on any point.