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 eliminating entry is needed in preparing consolidated financial statements for 20X8 to remove all effects of the intercompany sale?

Question

Quizplus · Accepted Answer

Option A eliminates the effects of the intercompany sale by reducing Local Company's inventory balance by $560,000 (28,000 x $20) and increasing cost of goods sold by the same amount. It also reduces Global Corporation's accounts receivable balance by $560,000, which reflects that Local Company no longer owes Global for the purchase of the picture tubes. This is the correct entry to eliminate the effects of the intercompany sale in accordance with the cost method of accounting for intercompany transactions. Option B and C do not eliminate the effects of the intercompany sale. Option D eliminates only the effects on Global Corporation's side.

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