Frigatebird Co. bought 75% of the outstanding voting stock of Cliff Corporation

Question

Frigatebird Co. bought 75% of the outstanding voting stock of Cliff Corporation at book value several years ago. Frigatebird sells merchandise to Cliff at 125% above Frigatebird’s cost. Intercompany sales from Frigatebird to Cliff for 2005 were $650,000. Unrealized profits in Cliff’s December 31, 2004 inventory and December 31, 2005 inventory were $27,000 and $38,000, respectively. Cliff reported net income of $900,000 for 2005. Required: 1 Determine Frigatebird’s income from Cliff for 2005. 2 In General Journal format, prepare consolidation working paper entries to eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is used. Frigatebird Co. bought 75% of the outstanding voting stock of Cliff Corporation at book value several years ago. Frigatebird sells merchandise to Cliff at 125% above Frigatebird’s cost. Intercompany sales from Frigatebird to Cliff for 2005 were $650,000. Unrealized profits in Cliff’s December 31, 2004 inventory and December 31, 2005 inventory were $27,000 and $38,000, respectively. Cliff reported net income of $900,000 for 2005. Required: 1 Determine Frigatebird’s income from Cliff for 2005. 2 In General Journal format, prepare consolidation working paper entries to eliminate the effects of the intercompany inventory sales assuming the perpetual inventory method is used.

Explanation / Answer

Answer 1 Frigatebird Co Income from Cliff in 2005 Sales to Cliff ( in $) 650000 Sales to cliff is at 125% of cost Hence cost of sales = Sales / 125% 520000 Hence Income from Cliff (In $) 130000 Answer 2 Journal entry to eliminate the effect of intercompany inventory sales Particulars Debit Credit Sales 650000 Cost of goods sold 641200 Inventory 8800 Notes Unrealised profit in Cliff Inventory on 1.1.15 27000 Unrealised profit in Cliff Inventory on 31.12.15 38000 Unrealised profit relating to 2015 Sales 11000 Cost of goods in Inventory (11000/ 125%) 8800

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