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studyfreak
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Posted: 30 Dec 2009 at 15:59 | IP Logged  

Selected data for two subsidiaries of Dunn Corp. taken from 12/31/09 preclosing trial balances are as follows:

                             Banks Co. DR       Lamm Co. CR

Shipments to banks                              150,000
Shipments from Lamm     200,000
I-C inv profit                                            50,000

Inventory acquired
from outside parties       175,000&nbs p;         250,000
Inventory from Lamm       60,000

What is combined inventory on 12/31/09?

Answer is $470,000.  I understand that we'd include the inventory from the outside parties of total $425,000.  But how the heck do we account for the other $45,000?  The answer key doesn't make sense to me.  Why would Banks make a debit at time of shipment of $200,000 if Lamm makes a credit of $150,000?        &am p;nb sp;  



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depressed
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Posted: 30 Dec 2009 at 19:43 | IP Logged  

The entries on Lam's Books is as follows:

DR Interco Receivable from Banks   200K

CR Sales   200K

DR Cost of Sales  150K

CR Inventory  150K

Therefore the interco profit on this transaction is 50K.

The inventory from Lam included interco profit of 25% (50k/200K). Therefore the inventory from Lam after eliminating the interco profit is 45K (60K x 75%)

So the total consolidated inventory will be 470K (425K + 45K)



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yukagin
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Posted: 04 Feb 2011 at 03:40 | IP Logged  

so basically on that 60K acquired from Lamm, 25% of it is
marked up due to the interco profit so it should only be
45K?

so it's the 425K plus the 45K to get the 470K.

does anyone have any other explanations? im still confused
as to why we calculate this gross margin % and multiply it
by the inventory we acquired internally please help?

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KIJ2011
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Posted: 04 Feb 2011 at 07:31 | IP Logged  

The way I understand the question is that the "Inventory from Lamm" is the inventory left after Banks sold the inventory received from Lamm.

Since intercompany sales and unrealized profits are eliminated in the consolidated F/S, you have to take out the unrealized profits from the 60,000 inventory. As depressed explained, the unrealized profit of the 60,000 inventory would be 60,000/200,000 x 50,000 = 15,000. Therefore total inventory would be

175,000 + 250,000 + 60,000 - 15,000 = 470,000

It took me a while to understand the question. Hoping something ambiguous as this doesn't appear in the test.



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tkphotomania
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Posted: 26 Mar 2011 at 21:43 | IP Logged  

Dunn Corps' F/S must appear as if the intercompany transaction had not
occurred, which is why the unrealized profit must be ELIMINATED.

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