Question

Pale Company owns 80% of Sienna Co. The excess of acquisition cost was entirely attributed to previously unrecorded intangibles. For FYE 2017, Sienna reported net income of $7,000,000 and declared and paid dividends of $2,000,000. Amortization of the previously unrecorded intangible assets for 2017 is $1,750,000. Also consider the following:

In 2017 Sienna sold land to Pale at a recorded loss of $300,000. Pale still owns the land at year-end 2017.

Pale’s ending inventory at year-end 2017 included merchandise acquired from Sienna. The unconfirmed profit on the inventory was $600,000.

Pale’s ending inventory at the previous year-end included merchandise acquired from Sienna. The unconfirmed profit on that inventory was $350,000

On 1/3/2014, Pale sold equipment to Sienna at a gain of $1,000,000. At the time of the sale, the remaining life of this equipment was 10 years (straight-line). Sienna still holds the equipment at 12/31/2017

What is the working paper eliminating entry in 2017 needed to recognize the unconfirmed profit in beginning inventory due to upstream sales.

a) Debit COGS $300,000; Credit retained earnings; beginning $300,000

b) Debit retained earnings, beginning $300,000; Credit COGS $300,000.

c) Debit inventory $300,000; Credit COGS $300,000.

d) Debit COGS $300,000; Credit inventory $300,000

Answer 1

b) Debit Retained earning -beginning $300,000; Credit the COGS $300,000

explanation

when you have the unconfirmed profit in beginning inventory due to the upstream sales ,this time debit the retained earnings because the unconfirmed proit is reduced from the beginning retained earnings and credit the COGS. usually upstream and down stream sales are occure when there is a inter company sales . upstream sales occur when subsidiary sells inventory to the parent entity . downstream occur when sales from parent entity to subsidiary .