Question

On January 1, 2013, Price Company acquired an 80% interest in the common stock of Smith Company on the open market for $811,500, the book value at that date.

On January 1, 2014, Price Company purchased new equipment for $15,000 from Smith Company. The equipment cost $9,700 and had an estimated life of five years as of January 1, 2014.

During 2015, Price Company had merchandise sales to Smith Company of $96,200; the merchandise was priced at 25% above Price Company’s cost. Smith Company still owes Price Company $17,400 on open account and has 20% of this merchandise in inventory at December 31, 2015. At the beginning of 2015, Smith Company had in inventory $22,700 of merchandise purchased in the previous period from Price Company.

Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for the year ended December 31, 2015.

Account Titles and Explanation	Debit	Credit
(To eliminate intercompany sales)
(To eliminate intercompany receivables)
(To eliminate intercompany profit in ending inventory purchased in current period)
(To eliminate intercompany profit in ending inventory purchased in previous period)
(To eliminate intercompany profit in equipment)
(To eliminate depreciation on equipment)

Answer 1

Solution

Workpaper entries to eliminate the effect of intercompany sales interest to be deducted:

Date	Account Titles	Debit	Credit
Dec 31, 2015	Sales	$96,200
	Cost of Sales (Purchases)		$96,200
	(to eliminate intercompany sales)
Dec 31, 2015	Accounts Payable	$17,400
	Accounts Receivable		$17,400
	(To eliminate intercompany receivables)
Dec 31, 2015	Cost of Sales (beginning inventory - income statement)	$3,848
	Inventory		$3,848
	(to eliminate intercompany profit in ending inventory purchased in current period)
Dec 31, 2015	Beginning Retained Earnings – Price	$4,540
	Cost of Sales (beginning inventory - income statement)		$4,540
	(to eliminate intercompany profit in ending inventory purchased in previous year)
Dec 31, 2015	Beginning Retained Earnings – Price		$4,240
	Non-controlling Interest		$1,060
	Property, Plant and Equipment
	(To eliminate intercompany profit in equipment; (15,000 - 9,700) x 80% = 4,240; NCI = (15,000 - 9,700) x 20% = 1,060
Dec 31, 2015	Accumulated Depreciation	$2,120
	Depreciation Expense		$1,060
	Beginning Retained Earnings – Price		$848
	Non-controlling Interest		$212
	(To eliminate depreciation on equipment)

Computations:

1. Intercompany profit in ending inventory purchased in current year –

Ending inventory current year = 20% of sales

= 20% x 96,200 = $19,240

Profit = 25% above price

ending inventory at cost = 19,240/1.25 = $15,392

intercompany profit 19,240 – 15,392 = $3,848

2. Intercompany profit in ending inventory purchased in previous year:

Ending inventory of previous year = $22,700

At cost = 22,700/1.25 = $18,160

Intercompany profit = 22,700 – 18,160 = $4,540

3. Equipment cost = 15,000 – 9,700 = $5,300
4. Depreciation = 5,300/5 = $1,060