Question 1: Chapter 6 - Inter-company Inventory Transactions (23 marks)

(Hint: you might wish to consult the PAT and SAT video and/or video script before you try the problem)

On January 1, Year 2, P Ltd. acquired 90% of S Inc. when Ss retained earnings were $910,000. There was no acquisition differential. P accounts for its investment under the cost method. S sells inventory to P on a regular basis at a markup of 30% of selling price. The inter-company sales were $50,000 in Year 2 and $80,000 in Year 3. The total amount owing by P related to these inter-company sales was $10,000 at the end of Year 2 and $8,000 at the end of Year 3. On January 1, Year 3, the inventory of P contained goods purchased from S amounting to $10,000, while the December 31, Year 3, inventory contained goods purchased from S amounting to $20,000. Both companies pay income tax at the rate of 40%.

Selected account balances from the records of P and S for the year ended December 31, Year 3, were as follows:

	P	S
Inventory	$10,000	$310,000
Account Payable	610,000	330,000
Retained earnings, beginning of year	2,410,000	1,110,000
Sales	4,010,000	2,510,000
Cost of sales	3,110,000	1,710,000
Income tax expense	90,000	60,000

Required:

• Prepare the inter-company profit analysis for year 3. (8 marks)
• Show the consolidation worksheet entries to recognize and eliminate inter-company inventory profits you identified above in part a for year 3. (5 marks)
• Calculate and report the amount to report on the Year 3 consolidated financial statements for the selected accounts noted above. (10 marks)