Consolidation Problem On January 1, 2014, Ponn Inc. aquired 80 percent of Skeet
ID: 2570006 • Letter: C
Question
Consolidation Problem
On January 1, 2014, Ponn Inc. aquired 80 percent of Skeet Company's stock by issuing common stock with a fair value of $180,000.
1. On January 1, 2017, Ponn held inventory purchased from Skeet for $26,000. Skeet sells inventory to the parent at 60% above cost. During 2017, Ponn purchased an additional $64,000 of goods from Skeet that had originally cost Skeet $40,000. They still hold $16,000 of those purchases.
2. Ponn Inc. also sells inventory to Skeet. During 2016, Ponn sold inventory costing $50,000 to Skeet for $75,000, and Skeet resold 70% of the inventory in 2016 and 30% in 2017. During 2017, Ponn sold inventory that cost them $35,000 to Skeet for $52,500. Skeet resold 75% of these purchases in 2017 and continues to hold the rest at the end of the year.
Prepare all equity entries that Ponn would have recorded during 2017
Prepare all eliminating entries needed to complete a consolidation workpaper as of December 31, 2017.
Explanation / Answer
Journal Entries in the Books of Ponn to be recorded during 2017:
To Skeet 64000
(Being Goods Purchased)
To Closing Stock 6000
(Being Profit included in Stock eliminated 16000 x 60/160)
Journal Entries in the Books of Skeet to be recorded during 2017:
To Closing Stock 4375
(Being Profit included in Stock eliminated 52500 x 25% x 17500/52500)
Working Notes:
No Stock Reserve is required to be created for Stock Sold. Stock Reserve to be maintained for Stock in Hand only.
Stock Purchased 52500
Stock in Hand 52500 x 25% = 13125
Profit Included 52500 – 35000 = 17500
Profit included in Closing Stock in Hand = 13125 x 17500/52500 = $4,375.
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