Question

intercompany transaction: A sold B inventory for $212 on 7/31/X3. B sold 35% of the inventory to its customers in 20X3. B sold the remaining 65% of the inventory to its customers in 20X4. These sales for A and B are price based on cost + 40%.

Intercompany Transaction: On 1/1/X1, B issued $400 of 12%, 10 year bonds to the public at 106. The bonds pay interest on 12/31. On 1/1/X3, A purchased 40% of B's bonds from the public at 94. Both of the firms use straight line amortization

Prepare all of the consolidating entries for 20X3 and please show the necessary calculations.

Answer 1

A soldB inventory for $ 212

It was priced as cost plus 40%

So the profit to A on such sale = 212 x 40 / 140 = 61

65% of inventory is with B as at the end of 20x3

So the profit to the extent of 65% to be eliminated = $ 39

the entry will as follows

Stock reserve debit $ 39

To inventory credit $ 39

Interest payment on bonds purchased by A should be eliminated = ( 400 x 12% ) x 40% = 19.2

amortization on bond = ( 106 - 94) / 10 = 1

intercompany revenue debit $ 20.2

Interest payment credit $ 19.2

Investment credit $ 1