Question

In preparing the consolidation worksheet for Pencil Corporation and its 60 percent–owned subsidiary, Stylus Company, the following consolidation entries were proposed by Pencil's bookkeeper:

Worksheet Entries	Debit	Credit
Cash	100,000
Accounts Payable		100,000
To eliminate the unpaid balance for intercorporate inventory sales in 20X5.
Cost of Goods Sold	16,800
Income from Stylus Company		16,800
To eliminate unrealized inventory profits at December 31, 20X5.
Income from Stylus Company	196,000
Sales		196,000
To eliminate intercompany sales for 20X5.

Pencil's bookkeeper recently graduated from Oddball University, and although the dollar amounts recorded are correct, he had some confusion in determining which accounts needed adjustment. All intercorporate sales in 20X5 were from Stylus to Pencil, and Stylus sells inventory at cost plus 40 percent of cost. Pencil uses the fully adjusted equity method in accounting for its ownership in Stylus.

Required:
a. What percentage of the intercompany inventory transfer was resold prior to the end of 20X5? (Do not round your intermediate calculations. Round your final answer to nearest whole percentage.)

b. Prepare the appropriate consolidation entries needed at December 31, 20X5, to prepare consolidated financial statements. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations.)

• Record the entry to eliminate intercompany receivable/payable.
• Record the entry to eliminate the intercompany inventory sale.

Answer 1

a)Calculation of percentage of intercompany inventory transfer

Sale value   = Cost + 40% of cost = 1.4 times x cost of goods sold Cost of goods sold   =   Sale value / 1.4                                         = $196,000 / 1.4                                         =   $140,000

Profit   = Sales (-) Cost of goods sold               =   $196,000 (-) $140,000               =   $56,000

Unrealized Profits at year end = $16,800

Percentage of intercompany Transfer   = unrealized Profits / profit on sale                                                                                 = $16,800 / $56,000                                                                                 =   30%

Percentage of intercompany Transfer was resold prior to 20X5   = 100% (-) 30%                                                                                                                                   = 70%

Percentage of intercompany Transfer was resold prior to 20X5   = 70%

b)

Date	Particulars	Debit (in $)	Credit (in $)
	Accounts payable	$100,000
	Accounts receivable		$100,000
	(To record elimination of intercompany receivable or payable)
	Sales (Intercompany) - Stylus (Elimination of Intercompany sales)	$196,000
	Cost of goods sold (Intercompany) - Stylus            (Elimination of Intercompany cost of goods sold)		$140,000
	Cost of goods sold (Intercompany) - Pencil            (Corrected resale entry)		$39,200
	Inventory (Intercompany) - Pencil            (Correcting unrealized Profit )		$16,800
	(To record elimination of intercompany Sale))

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