Parent made the decision to purchase 100% of Sub to capture a specific production capability for parts
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Question:
Parent made the decision to purchase 100% of Sub to capture a specific production capability for parts needed in Parent’s continuous production processes and to protect the process from competitors.
All purchases from Sub are on account with 75% of the billings remitted in the year of purchase and 25% remitted in the following year. During the years 2019-2021, the inventory transactions were as follows:
Year | Cost to Sub | Transfer Price to Parent | Gross Profit Rate | Inventory Transferred & Remaining in Ending Inventory |
2019 | $100 | $140 | 28.6% | $20 |
2020 | 100 | 150 | 33.3% | 30 |
2021 | 120 | 160 | 25% | 36 |
Any parts in ending inventory at year-end are the first parts put into production in the new year.
- a. Prepare Parent’s journal entry to record the purchase of inventory from Sub in 2021.
- b. Prepare Sub’s journal entry to record the sale of inventory to Parent in 2021.
- c. Show the computation of the gross profit to be deferred/recognized in the ending inventory resulting from the intercompany transfer of inventory.
Related Book For
Management Accounting Information for Decision-Making and Strategy Execution
ISBN: 978-0137024971
6th Edition
Authors: Anthony A. Atkinson, Robert S. Kaplan, Ella Mae Matsumura, S. Mark Young
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