Pecos Athletics and its subsidiary, Stetson Footwear, engage in intercompany tra

Question

Pecos Athletics and its subsidiary, Stetson Footwear, engage in intercompany transactions as follows:

Pecos sells merchandise to Stetson at a markup of 35% on cost. In 2018, Pecos sold merchandise to Stetson, charging a total of $16,875,000. Although Stetson did not have any merchandise purchased from Pecos in its beginning inventory, it still held $175,500 of this merchandise in its ending inventory. In 2019, Pecos sold another $12,825,000 in merchandise to Stetson. Stetson held $148,500 of this merchandise in its ending inventory.

At the beginning of 2018, Stetson sold machinery with an original cost of $900,000 and accumulated depreciation of $340,000 to Pecos for $700,000. The machinery had a 7-year remaining life.

REQUIRED:

A. Determine the amounts that would be included in the following account balances reported in the end of year trial balances of the separate companies for 2019 related only to the transactions above. Enter your answers in the space provided. Enter credit amounts in parentheses. If no amount would be included related to these transactions, leave the space blank.

B. Determine the amounts that would be included in the 2019 consolidated end of year balances related to these transactions. Enter your answers in the space provided. If no amount would be included related to these transactions, leave the space blank.

C. Provide the eliminating entries necessary to convert the separate company balances to consolidated balances for these transactions.

PECOS

STETSON

CONSOLIDATED

Sales

Cost of goods sold

Depreciation expense

Inventory

Machinery

Accumulated depreciation, machinery

PECOS

STETSON

CONSOLIDATED

Sales

Cost of goods sold

Depreciation expense

Inventory

Machinery

Accumulated depreciation, machinery

Explanation / Answer

Depreciation = 700000/7 *1 = 100000 in 2018 & 2019

Acc Dep = 100000 + 100000 = 200000

COGS = 12825000/ 1.35 = 950000

3. Unrealised profit on stock = 148500/1.35*.35 = 38500

Unrealised profit a/c dr 38500

to Inventories 38500

COGS A/c dr 12825000

to Sales 12825000

Pecos Stetson Consolidated Sales 12825000 12825000 COGS 12825000 12825000 Depreciation expenses 100000 100000 Inventory 148500 148500 Machinery 700000 700000 Acc Depreciation 200000 200000

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