French Ltd owns 100 per cent of the issued capital of Pastry Ltd. During the period ended 30 June 2006 Pastry Ltd sold inventory that cost $190,000 for $300,000 to French Ltd. Sixty per cent of this inventory remains on hand in French Ltd at the end of that year. Both companies use a perpetual inventory system. The taxation rate is 30 per cent.
What consolidation journal entries are required in relation to the inter-company transaction for the period ending 30 June 2007?
E) None of the given answers.

Question

Quizplus · Accepted Answer

To eliminate the unrealized profit in ending inventory, the consolidation process requires an adjustment to be made to remove the portion of the inventory that remains on hand in French Ltd. 
The following entries will be required:

1. To eliminate the unrealized profit on the original sale:
Dr Cost of sales $190,000
Cr Inventory $190,000

2. To eliminate the inter-company receivable and payable:
Dr Intercompany receivable $180,000 (60% x $300,000)
Cr Intercompany payable $180,000

3. To eliminate the inter-company profit:
Dr Inventory $72,000 (60% x $120,000)
Cr Cost of sales $72,000

Note: The taxation rate is not relevant to the consolidation entries.

French Ltd Owns 100 Per Cent of the Issued Capital