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A Company holds 80% of B Company stock. In the current year A reports sales of $800,000 and cost of goods sold $600,000....

A Company holds 80% of B Company stock. In the current year A reports sales of $800,000 and cost of goods sold $600,000. For the same period, B has sales of $400,000 and cost of goods sold of $280,000. In the prior year, A sold inventory to B for $100,000, which cost A $75,000. B had $20,000 of this inventory on hand at year end. During the current year, A sold inventory to B for $120,000, which cost A $96,000. At year end B possesses 40% of the inventory. A had established the transfer price on its normal gross profit rate.

Required:

Prepare the consolidation entries necessitated by the intra-company sales.

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Answer #1

PLEASE SEE WORKINGS :

WORKINGS
A B
SALES 800000 SALES 400000
COS 600000 COS 280000
PROFIT 2,00,000 PROFIT 120000 A HOLDS 80% STOCK MARGIN
A80% 25% ON 16000
OP 100000 20000 16000 OP 4000
75000
25000
CURR 120000 38400 CL 48000 7680
96000
24000
20.00%
CONCLUSION : Unrealised profit on opening stock is 4000
Unrealised profit on closing stock 7680
ACCOUNTING ENTRY

TO TRANSFER UNREALISED PROFIT FROM PREVIOUS PERIOD TO CURRENT PERIOD :

1. RETAINED PROFITS 4000

TO COGS EXPENSES ACCOUNT (ON ACCOUNT OF OPENING INVENTORY) 4000

==============================================================================

2. TO ELIMINATE UNREALISED PROFIT IN CLOSING INVENTORY :

COGS EXPENSE (ON ACCOUNT OF CLOSING INVENTORY) 7680

TO INVENTORY ACCOUNT ( ASSET ACCOUNT)    7680

=================================================================================

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