ACC 460/540
Advanced Accounting I/Contemporary Financial Accounting Topics
Dr. Mahoney
Homework Problems:
Intercompany Transactions
1. On June 9, Pluto Co. sold inventory to its wholly owned subsidiary, Saturn Co. for $375,000. The
cost of this inventory to Pluto was $300,000. Thus, Pluto sold the inventory to Saturn at a 25%
mark-up above cost (i.e., $300,000 cost x 1.25 = $375,000 transfer price). Both companies
maintain a perpetual inventory system.
What is the journal entry recorded by Pluto?
Cash A/c
To Sales
375,000
375,000
COGS
To Inventory
300,000
300,000
What are the journal entries recorded by Saturn?
Inventory
To Cash
375,000
375,000
On July 25, Saturn sells half of this inventory to its (third-party) customers for $280,000.
What are the journal entries recorded by Saturn? (Remember, Saturn is using a
perpetual inventory system).
Cash
To Sales
280,000
280,000
COGS
To Inventory
187,500
187,500
It is now December 31, and Saturn continues to own the remaining inventory (i.e., the other half
of the $375,000 inventory it acquired from Pluto on June 9). On today’s (12/31) consolidation
worksheet, what is the appropriate worksheet entry?
Inventory left with Saturn 375,000 – 187,500 = 187,500. This includes intercompany profit for
parent
Intercompany profit Calc:
300,000 = 80% cost and 20% profit
375,000
Profit in ending Inventory = 187,500*20% = 37,500.
COGS Calc:
Inventory % sold by sub = 50%
50% of inventory cost for Parent = 300,000*50% = 150,000
So in consolidated books, cost of Inventory sold should be at 150,000
Total COGS = 300,000 + 187,500 = 487,500
Eliminate COGS so that it becomes 150,000 = 337,500. (487,500 – 150,000)
Elimination Entry
Sales
375,000(eliminating intercompany sales)
COGS
337,500(removing excess COGS to make it to 150,000)
Inventory
37,500(removing Intercompany profit)
2. On January 1, Papa sells equipment to its wholly owned subsidiary, Sonny, for $200,000. The
original cost of the machine to Papa was $300,000. At today’s date, the Accumulated
Depreciation on Papa’s books was $80,000. The equipment has an estimated remaining service
life of 10 years (no salvage value).
What is the January 1 journal entry recorded by Papa?
Cash
Acc Dep
Loss on sale
To Equipment
200,000
80,000
20,000
300,000
What is the January 1 journal entry recorded by Son?
Equipment
To Cash
200,000
200,000
What is the December 31 adjusting journal entry recorded by Son?
Depreciation
To Accum Dep
20,000
20,000
What is the December 31 consolidation worksheet entry?
Equipment
100,000
Depreciation
10,000(30,000 original dep – 20,000 subs recorded dep)
Loss on sale 20,000
Accum Dep
90,000
What is the consolidation worksheet entry at December 31 of the second year
Equipment.
100,000(Restating to parent’s cost)
Depreciation
10,000(30,000 original dep – 20,000 subs recorded dep)
Accum Dep
92,000(Op balance of 90k + Current year Dep of 20000/10 years)
Retained Earnings 18,000(Loss of 20,000 – Current year Dep of 20000/10 years)
3. The December 31 consolidation worksheet of Popcorn Co. and its wholly owned subsidiary, Salt
Co., includes the following worksheet entry:
Gain on Sale of Equipment
10,000
Equipment
40,000
Accumulated Depreciation – Equipment
12,000
For each of the three components of this worksheet entry, answer the question, “Why?”
Removing the gain on sale of equipment
Restating the equipment to original value of parent company in Cons F.S
Restating the Accum Dep to original value of parent company in Cons F.S