Question

Parent Corporation owns 90 percent of Subsidiary Company's stock. During 2018, Parent sold inventory purchased $48,000 to Subsidiary for $60,000. Subsidiary then sold half of the inventory to a nonaffiliate by the end of the year. On 2018, Parent sold $15,000 inventory which was purchased from Subsidiary in 2017. The cost of inventory for Subsidiary was $10,000. Prepare Parent’s adjusting journal entries and the consolidation entries that related to intercompany sale of inventory for 2018. (Remember to include all necessary reversal journal entries to Parent’s accounts in the consolidation entries)

Answer 1

As closing Inventory of Subsidiary includes half of the stock purchased from Parent company. that is of $30,000 and original cost of that is $24,000.(48000/2). thus it includes profit of $6,000 ($30000-$24000).

thus in parents books this profit should be eliminated and accordingly inventory should be reduced while consolidating.

this effects can be given by passing the below journal entry.

--> Cost of goods sold / Retained earnings    A/c Dr. $ 6,000

To Closing Inventory    $ 6,000

(Adjusting entry passed for elimination of downstream inventory)

*while goods of $15,000 purchased from subsidiary are already sold to external party so there is no inventory of that stock so no need any adjusting entry.