Downstream Intercompany Merchandise Transactions Sketchy Shoes is a subsidiary o

Question

Downstream Intercompany Merchandise Transactions

Sketchy Shoes is a subsidiary of Pacific Brands. Pacific routinely sells merchandise to Sketchy at a 25% markup on cost. Information on intercompany merchandise transactions is below (in thousands):

Required

a. Prepare the working paper eliminating entries related to these intercompany transactions at December 31, 2017.

b. Assume Sketchy sold merchandise acquired from Pacific Brands for $600,000 during 2017. What amounts appear on the separate books of Pacific Brands and Sketchy Shoes, relating to the intercompany merchandise transactions, for sales revenue and cost of goods sold? What are consolidated sales and cost of goods sold? Show how the eliminating entries in part a above adjust the balances reported on the separate books of the two entities to the correct consolidated balances.

Remember to use negative signs with your credit balance answers in the Dr (Cr) columns.

Inventory balance on Sketchy’s books, purchased from Pacific Brands, January 1, 2017 $ 12,500 Inventory balance on Sketchy’s books, purchased from Pacific Brands, December 31, 2017 13,250 Total sales revenue recorded by Pacific Brands on merchandise sales to Sketchy in 2017 500,000

Explanation / Answer

Question a. Consolidation Journal Description Debit Credit (I-1) Inventories 2500 Equity in net income of Sketchy 2500 To eliminate intercompany profit from Sketchy's beginning inventory (12500 x 25/125) (I-2) Sales revenue 100000 Cost of goods sold 100000 To eliminate intercompany sales and purchases (I-3) Equity in net income of Sketchy 2650 Inventories 2650 To eliminate intercompany profit from Sketchy's ending inventory Question b. Consolidation Working Paper Accounts Taken From Books Eliminations Pacific Brands Sketchy Shoes Debit Credit Consolidated Balances Dr (Cr) Dr (Cr) Dr (Cr) Sales revenue -500000 -600000 (I-2) 100000 -100000 Cost of goods sold 400000 -500000 (I-3) 100000 (I-2) 100000 Answer (I-1) 0

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