Intercompany Transactions Exercises
QUESTION
Part 1.
FASB requires companies to eliminate the effects of transactions between a parent and its subsidiaries. In this Discussion, you will consider why FASB has this rule.
Write at least 200 words answering the following questions:
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- Why do you think FASB requires companies to eliminate intercompany transactions on their consolidated financial statements?
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- How might failing to eliminate intercompany transactions mislead investors?
Part 2.
Intercompany Transactions Exercises
Answer the following in a Word document:
P Corporation owns 75 percent of its subsidiary, S Company. The price P Corporation paid for S Company was equal to 75 percent of the book value of S Company’s net assets. P Corporation accounts for its investment in S Company under the cost method of accounting. Income statements for the year ending December 31, 2010, are as follows.
P Corporation
Income Statement
Year ending December 31, 2010
Sales 1,200,000
Cost of goods sold (875,000)
Gross profit 325,000
SG & A expense (115, 000)
Net income 210,000
S Company
Income Statement
Year ending December 31, 2010
Sales 847,000
Cost of goods sold (638,000)
Gross profit 209,000
SG & A expense (54,000)
Net income 155,000
1. In 2010, P Corporation purchased goods (to be held in inventory) from S Company for cash of $125,000. S Company recorded $93,000 in cost of goods sold when the sale was made. P Corporation resold all of the items to a customer for $165,000. Prepare the necessary journal entry or entries to eliminate intercompany profits and the double-counting of sales.
2. Assume that in the preceding scenario, P Corporation sold only half of the goods it acquired from S Company at a price of $82,500. Prepare the necessary journal entry or entries to eliminate intercompany profits, the double-counting of sales, as well as any effect the intercompany transaction has on ending inventory.
3. In 2010, P Corporation purchased an investment in another company from S Company for $70,000. S Company originally paid $55,000 for this investment. Prepare the necessary journal entry or entries to eliminate the intercompany sale.
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