Question

Pirate Corporation acquired 85 percent of Ship Company's voting shares of stock in 20X7. During 20X8, Pirate purchased 50,000 circuit boards for $15 each and sold 28,000 of them to Ship for $20 each. Ship sold all of the units to unrelated entities prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory systems. Which worksheet consolidating entry is needed in preparing consolidated financial statements for 20X8 to remove all effects of the intercompany sale?

1. Sales 560,000
Cost of Goods 560,000
2. Sales 650,000
Cost of Goods 650,000
3. Cost of Goods Sold 560,000
Sales 560,000
4. Cost of Goods Sold 650,000
Sales 650,000
a. Option 1
b. Option 2
c. Option 3
d. Option 4

Answer 1

a. Option 1

Step-by-step explanation:

The sale of circuit boards by Pirate to Ship is an intercompany transaction. The Revenue will be overstated and thus must be eliminated in Pirate also the cost of sale in Ship will be overstated and must thus be eliminated.

Journal

Revenue $560,000 (debit)

Cost of Sales $560,000 (credit)

28,000 × $20 = $560,000