Question

Parent Co owns 100% of the common stock of Sub Co. Parent Co sold inventory with a cost of $1,000,000 to Sub Co for $1,100,000 during Year 1. The Year 1 ending inventory of Sub Co included goods purchased from Parent Co for $660,000. Sub Co had a remaining account payable balance to Parent Co of $200,000 on December 31, Year 1.

CR Journal entry to record the sale by Parent Co DR 1,100,000 Accounts receivable Sales 1,100,000 Cost of goods sold 1,000,000 Inventory 1,000,000 CR Journal entry to record the purchase by Sub Co DR 1,100,000 Inventory Accounts payable 1,100,000

Record the eliminating journal entry

Q: The following eliminating journal entry and T account are my understanding of this case. I cannot understand the allocation part because $440,000 is not COGS but how much inventory was out for me. The above eliminating journal entry is an answer given by my professor, but I cannot understand very well.

Dr. Sales $1M

Cr. COGS $1M

Cr. Inventory $0.1M

Answer 1

In consolidation we eliminate any profits realised from sales between parent and the subsidiary. Accordingly,

Parent sells goods of $ 1000,000 to Subsidiary for 1,100,000. So profit on cost to parent =>

(1100000-1000000)/1000000*100 = 10%.

So goods are lost at Cost + 10% of cost to Subsidiary.

Given that goods worth 660000 are in stock in the books of Subsidiary. This includes profit on sale by Parent. So profit to be eliminated = 660000 * 10/110 = 60,000. (A)

Since goods worth 660000 are still in inventory, the balance ie 1100,000 - 660000 = 440,000 are sold to outside party by the subsidiary. This is the Cost of Goods sold by subsidiary. So have to eliminate the profit of parent on this Cost of Goods Sold by the subsidiary. So that will be 440,000*10/110 = 40000. (B)

Please note that Cost of goods sold by Subsidiary as well the inventory of goods held by the subsidiary includes profit on sale made by the parent ie 10%. Hence we are eliminating this profit of 10% from the same in the above.

Thus the journal entry will be  

Sales a/c Dr (Ie eliminating sales entry)	1100,000
To Cost of Goods sold (Parent)		1000,000
To Inventory (subsidiary) (See A above)		60,000
To Cost of Goods sold (Subsidiary) (See B above)		40,000
Accounts Payable Dr (elimination by reversal)	200,000
To Accounts Receivable (elimination by reversal entry)		200,000

Hope this helps. Please comment in case of any query regarding the solution.