Pants Company and Shirt Company both produce and purchase fabric for resale each period and frequently sell to each other. Since Pants Company holds 80 percent ownership of Shirt Company, Pants' controller compiled the following information with regard to intercompany transactions between the two companies in 20X7 and 20X8: Percent Resold toNonaffiliate in YearProduced bySold to20X720X8Cost toProduceSale Priceto Affiliate20X7Pants Co.Shirt Co.70%30%$170,000 $200,000 20X7Shirt Co.Pants Co.50%30% 50,000 80,000 20X8Pants Co.Shirt Co. 75% 35,000 52,000 20X8Shirt Co.Pants Co. 40% 230,000 280,000 Required:a. Give the consolidating entries required at December 31, 20X8, to eliminate the effects of the inventory transfers in preparing a full set of consolidated
financial statements.b. Compute the amount of cost of goods sold to be reported in the consolidated income statement for 20X8.
What will be an ideal response?
a.
Reversal of 20X7 downstream gross profit deferral:
| Investment in Shirt Co. | 9,000 | |
| Cost of Goods Sold | 9,000 |
Reversal of 20X7 upstream gross profit deferral:
| Investment in Shirt Co. | 12,000 | |
| NCI in NA of Shirt Co. | 3,000 | |
| Cost of Goods Sold | 9,000 | |
| Inventory | 6,000 |
Deferral of 20X8 unrealized profits on downstream transfer:
| ? | ||
| Sales | 52,000 | |
| Cost of Goods Sold | 47,750 | |
| Inventory | 4,250 |
Deferral of 20X8 unrealized profits on upstream transfer:
| Sales | 280,000 | |
| Cost of Goods Sold | 250,000 | |
| Inventory | 30,000 |
b.
| Inventory produced by Pants in 20X7 ($170,000 × .30) | $ 51,000 |
| Inventory produced by Shirt in 20X7 ($50,000 × .30) | 15,000 |
| Inventory produced by Pants in 20X8 ($35,000 × .75) | 26,250 |
| Inventory produced by Shirt in 20X8 ($230,000 × .40) | 92,000 |
| Cost of goods sold reported in consolidated income statement | $184,250 |
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