Pico Company, a truck manufacturer, owns 90% of the voting stock Seward Company.


Screenshot 2024 01 12 141526

Screenshot 2024 01 12 141526

Sol:

In the question, it is given that “Pico” a truck manufacturer, owns 90% of the voting stock of Seward . On January 1, 2014, “Pico” sold trucks to “Seward” for $350,000. The trucks, which represented inventory to “Pico”, had a cost to “Pico” of $260,000. The management of “Seward” estimated that the trucks had a useful life of six years from the date of purchase. “Seward” uses the straight line method to depreciate its capital assets. “Seward” reported $200,000 in net income from operations in 2014, while “Pico” reported $600,000 in net income from its independent operations.

Financial and operational exchanges between two or more businesses that belong to the same corporate group or parent company are referred to as intercompany transactions. These exchanges, which can include money transfers, goods, or services, are typical in multi-entity organizations.

The consolidated financial statements workpaper for the year ended December 31, 2014, the consolidated financial statements workpaper for the year ended December 31, 2015, is to be prepared.

Explanation:

The given information will be used to prepared the consolidated financial statements workpaper for the year ended December 31, 2014, 2015.

 

Step 2 of 2

Journal entries in consolidated financials statements for year ended 31 December, 2014 –

Date Particular Amount Amount
31, december 2014 Revenue(intercompany sales) A/c Dr $3,50,000
To fixed assets A/c 2,60,000
To cost of goods sold A/c 90,000
( Being sale of trucks of intercompany eliminated from the books of accounts)
Accumulated depreciation A/c Dr $15,000
To depreciation expenses A/c $15,000
(Being depreciation eliminated on equipment)

Working note of depreciation expenses –

Depreciation expenses is calculated using the straight-line depreciation method.

Initial cost of Trucks : $350,000(intercompany sale)

Cost of Pico company : $260,000

Depreciable Amount : initial cost – cost to Pico company

$350000-260000

Depreciable Amount = $90,000

Note – Life of truck is estimated to be 6 years

Annual depreciation expenses – Depreciation amount / useful life

Annual Depreciable expenses = $90000/6

Annual Depreciable expenses = $15000 per year .

 

Journal entries in consolidated financials statements for year ended 31 December, 2015 –

Date Particulare Amount Amount
31,December 2015 Reservers A/c Dr $75,000
To fixed Assets A/c $75,000
( Being the opening balance adjusted for recorded fixed assets )
Accumulated depreciation A/c Dr 15,000
To depreciation expenses A/c $15,000
(Being depreciation charged on the element reversed for the year 2015)

 

working note – The trucks were sold to Seward Company for $350,000 on January 1, 2014. The cost of the trucks to Pico Company was $260,000. The difference between the selling price and the cost is $350,000 – $260,000 = $90,000, which represents the profit on the intercompany sale.

Since the management of Seward Company estimated the trucks to have a useful life of six years, the annual depreciation is calculated as $90,000 / 6 years = $15,000 per year.

Explanation:

The consolidated financial statements Workpapers for the year ended 31, 2014, 2015 is prepared by using the accounting principal of Intercompany Transactions.

Final solution

The journal entries for the workpaper entries related to intercompany sales for the year 2014 and 2015 have been prepared.

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