Question

Peter Corporation (the parent) during the year ended December 31, 2018, sold merchandise costing
$180,000 to Smith Company (a 75%-owned subsidiary) for a price of $225,000. Smith sold $190,000 of
the intercompany merchandise purchased from Peter to outside customers for $322,000 during 2018.
What is the intercompany mark-up?
Record the journal entries
Provide the inventory schedule for the Parent, Subsidiary, and Parents Actual: Beginning Inventory,
Purchases, Cost of Goods Sold and Ending Inventory.
What is the unrealized profit?
Create the partial Income Statement and Balance Sheet with the elimination entries and consolidated
results.
Record the elimination entries for the intercompany sale
What is the actual mark up to the customer for this sale?
What would be the elimination entry in the following year when the profit is realized?

Answer 1

	Parent to subsidiary		Subsidiary to outsider
Sale Price	225000		322000
Cost	180000		190000
Profit	45000		132000
Mark-up on cost	25%	=45000/180000
Mar-up on Sales	20%	=45000/225000

Journal entries
In the books of parent
Accounts receivable	225000
To sales		225000
Cost of goods sold	180000
To inventory		180000
In the books of subsidiary
Inventory	225000
to accounts payable		225000
Accounts receivable	322000
To sales		322000
Cost of goods sold	190000
To inventory		190000

Inventory schedule
	Parent	Subsidiary	Consolidated
Beginning	180000		180000
Purchase		225000
Cost of Goods sold	180000	190000	152000	=190000*180000/225000
Ending	0	35000	28000

Unrealised profit
Goods in inventory of subsidary	=225000-190000
	35000
Mark-up on sales	20%
Unrealised profit	=20%*35000
	7000

Partial income statement
	Parent	Subsidiary	Dr	Cr	Consolidated
Sales	225000	322000	35000		512000
Cost of goods sold	180000	190000		28000	342000
Gross profit	45000	132000			170000
Partial balancesheet
	Parent	Subsidiary	Dr	Cr	Consolidated
Inventory	0	35000		7000	28000
Assets
Retained earnings	45000	132000	7000		170000
Stockholders' equity

Elimination entries
Sales	35000
To cost of goods sold		28000
To inventory		7000

Actual Mark-up
Sales price	322000
Cost	152000
Profit	170000
Mark-up on cost	112%	=170000/152000
Mark-up on sales	53%	=170000/322000

Elimination entry in the following year
Retained earnings	7000
To inventory		7000