[AnaTG]

Hello,

Can someone please help me with this part from one paragraph on the Becker lecture and its related entry? Becker does give a whole JE example with dollar figures which I understood well except for the bolded part and its JE (it has no dollar figure). Here is the example:

Gearty Corp owns 100% of the common stock of Olinto Corporation. Gearty sold inventory with a cost of $1,000,000 to Olinto for $1,100,000 during year 1. The year 1 ending inventory of Olinto included goods purchased from Gearty for $660,000. Olinto had a remaining account payable balance to Gearty of $200,000 on 12.31.X1..

Here is the paragraph with the bolded part which is what I don’t get. “It is common for affiliated companies to sell inventory/merchandise to one another. Often this inventory/merchandise is sold at a profit. The total amount of this intercompany sale and COGS s/b eliminated prior to preparing consolidated financial statements. In addition, the I/C profit must be eliminated from the ending inventory and the COGS of the purchasing affiliate. 100% of the profit s/b eliminated even if the parent’s ownership interest is less than 100%. The I/C profit in beginning inventory that was recognized by the selling affiliate in the previous year must be eliminated by an adjustment (debit) to retained earnings.”.

Here is its JE:

D) Intercompany Sales $xxx

D) Retained Earnings (profit in beginning inventory) $xxx

C) Intercompany cost of goods sold $xxx

C) Cost of goods sold (intercompany profit included in COGS of the purchasing affiliate) $xxx

C) Ending inventory (intercompany profit in the inventory remaining) . $xxx

Oh, sorry, I also would like an example if possible to explain the pass key provided on the same chapter:

When inventory has been sold intercompany and the CPA examination requires you to correct the accounts, remember to reverse the original intercompany transaction (sale and cost of goods sold, internally) and:

Inventory sold to outsiders = correct cost of goods sold

Inventory still on hand = correct ending inventory .

Thanks!

Ana

[AnaTG]

OK, my bolding did not work, so this is the part of the paragraph I don't quite get it: The I/C profit in beginning inventory that was recognized by the selling affiliate in the previous year must be eliminated by an adjustment (debit) to retained earnings.”

And here is the pass key for which I need an example:

“When inventory has been sold intercompany and the CPA examination requires you to correct the accounts, remember to reverse the original intercompany transaction (sale and cost of goods sold, internally) and:

Inventory sold to outsiders = correct cost of goods sold

Inventory still on hand = correct ending inventory”

I appreciate any help!

Ana

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