Global Corporation acquired 85 percent of Local Company's voting shares of stock in 20X7.During 20X8,Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them to Local for $20 each.Local 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?

Question

Quizplus · Accepted Answer

Option A represents the proper consolidation entry to eliminate the intercompany sale of picture tubes between Global and Local. This entry adjusts Global's Sales and Cost of Goods Sold by reducing the intercompany sale and recognizing the profit that Local made on its external sale of the same products. It also adjusts Local's inventory and retained earnings to remove the intercompany profit and record the cost of the goods sold by Local. Option B and C are incorrect because they do not eliminate the intercompany sale or recognize the profit/loss associated with it. Option D is incorrect because it overstates Local's retained earnings by not reversing the intercompany profit that resulted from the initial purchase of the picture tubes from Global.

Global Corporation Acquired 85 Percent of Local Company's Voting Shares