Question

Perkins Company own 85% of Sheraton Company. Perkins Company sells merchandise to Sheraton Company at 20% above cost. During 2008 and 2009, such sales amounted to $450,000 and $486,000, respectively. At the end of each year, Sheraton Company had in its inventory one-third of the amount of goods purchased from Perkins during that year.

Prepare the workpaper entries necessary to eliminate the effects of the intercompany sales for 2008 and 2009.

Answer 1

2008

Correct Overstatement

Cost of Sales $450,000 (debit)

Revenue $450,000 (credit)

Correct Unrealized Profit in Inventory

Cost of Sales $25,000 (debit)

Inventory $25,000 (credit)

2009

Adjustments of Opening Balances

Retained Earnings $25,000 (debit)

Cost of Sales $25,000 (credit)

Correct Overstatement

Cost of Sales $486,000 (debit)

Revenue $486,000 (credit)

Correct Unrealized Profit in Inventory

Cost of Sales $27,000 (debit)

Inventory $27,000 (credit)

Step-by-step explanation:

The Sale of merchandise by Perkins Company (Parent) to Sheraton Company (Subsidiary) is an Intragroup transaction since the companies form a group.

This results in the Cost of Goods Sold and Revenue being overstated for each intra-sale transaction and an unrealized profit resulting in the inventory that has not been sold at the end of the period.

The above are the necessary adjustments that are required to correct the overstatement and unrealized profits.