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Downstream Intercompany Merchandise Transactions Sketchy Shoes is a subsidiary of Pa
cific Brands. Pacific routinely sells merchandise to Sketchy at a 25% markup on cost. Information on
intercompany merchandise transactions is below (in thousands)
Inventory balance on Sketchys books, purchased from Pacific Brands, January 1, 2020. . . . . . $ 6,250
Inventory balance on Sketchys books, purchased from Pacific Brands, December 31, 2020. . . 6,625
Total sales revenue recorded by Pacific Brands on merchandise sales to Sketchy in 2020. . . . . 250,000
Required
a. Prepare the working paper eliminating entries related to these intercompany transactions at Decem
ber 31, 2020.
b. Assume Sketchy sold merchandise acquired from Pacific Brands for $300,000 during 2020. What
amounts appear on the separate books of Pacific Brands and Sketchy Shoes, relating to the inter
company merchandise transactions, for sales revenue and cost of goods sold? What are consolidated
sales and cost of goods sold? Show how the eliminating entries in part a above adjust the balances
reported on the separate books of the two entities to the correct consolidated balances.
Answer & Explanation
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