Parent Co. acquired 100% of Sub, Inc. on January 1, 2013. During 2013, Parent so

Question

Parent Co. acquired 100% of Sub, Inc. on January 1, 2013. During 2013, Parent sold goods to Sub for $480,000 that cost Parent $360,000. Sub still owned 40% of the goods at the end of the year. Cost of goods sold was $2,160,000 for Parent and $1,280,000 for Sub. a. Prepare all consolidation entries related to inventory and cost of goods sold for 2013. b. Compute consolidated cost of goods sold for 2013. c. Assuming that the remainder of the inventory was sold to third parties during 2014, prepare the 2014 consolidation entry to recognize the previously deferred profit.

Explanation / Answer

a) Journal entry

i.) Inventory of Subsidiary include 40% of goods bought from Parent Company.

Journal entry to deferred Unrealised profit

deferred profit Dr $ 48,000

Inventory Cr $ 48,000

Working

$ 480,000 X 40% = 192,000 X (480,000 -360,000) / 480,000 = 48,000

ii.) Cost of goods sold of Sub include 60% of goods purchased from Parent

Journal entry to eliminate unrealised profit

Unrealised profit Dr $ 72,000

Cost of Goods sold - Sub Cr $ 72,000

Working = total urealised profit on sale - unrealised profit in inventory = 120,000 - 48,000 = 72,000

iii.) to eleminate the sales made to sub by parent

Unrealised Sale Dr 360,000

Cost of goods Sold - Parent Cr 360,000

b) Consolidated Cost of goods sold 2013

c) Journal entry

Inventory Dr 48,000

Deferred profit Cr 48,000

Particulars Calculation Amount Cost of Goods sold - Parent ( 2,160,000 - 360,000) 1,800,000 Cost of goods Sold - Sub ( 1,280,000 - 72,000) 1,208,000 Total 3,008,000

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