Hi!

Can anybody please tell me where i can get info or explain how elimination of intercompany inventory/merchandise transaction works? I'm having a hard time understanding it.

Thank you so much.

I was really confused with how Becker explained it so I taught myself another way.  Maybe this will help you.  Start off with what both companies are recording in their books.  Let's use an example.

On May 1, Company A sells Company B merchandise for $150,000.  The merchandise cost Company A $100,000.  As of December 31, Company B sold all of the merchandise it purchased from Company B to outside parties for $200,000. 

Company A's Journal Entries to Record the Sale to Company B (intercompany)

Dr. Cash $150,000
Cr. Sales - Intercompany $150,000

Dr. Cost of Goods Sold - Intercomany $100,000
Cr. Inventory    $100,000

Company B's Journal Entry to Record the Purchase of Merchandise

Dr. Inventory  $150,000
Cr. Cash    $150,000

Company B's Journal Entries to Record the Sale of the Merchandise Originally Purchased by Company A

Dr. Cash $200,000
Cr. Sales  $200,000

Dr. Cost of Goods Sold $150,000
Cr. Inventory        &nb sp;     $150,000

Okay, so we know that we want to eliminate any sales or cost of goods sold in relationship to transactions between inter-related companies.  Company A CREDITED Sales - Intercompany for $150,000, so the elimination entry will DEBIT Sales - Intercompany for $150,000.  Company A DEBITED Cost of Goods Sold - Intercompany for $100,000, so the elimination entry will CREDIT Cost of Goods Sold - Intercompany for $100,000

So far we have for the elimination entry the following:

Dr. Sales - Intercompany $150,000
Cr. Cost of Goods Sold - Intercompany $100,000
Cr. ????????

The journal entry is not balanced.  We need a credit or credits that total to $50,000.  The remaining credits will be one of 3 possibilities (remember this on the exam):

1) Credit to Inventory
2) Credit to Cost of Goods Sold
3) Credit to Inventory and Credit to Cost of Goods Sold

What you credit depends on whether Company B has sold the merchandise or if some or all of it still remains in ending inventory.  In the example above, Company B sold all of its merchandise it purchased from Company A.  That means that your credit will be Cost of Goods Sold for $50,000.

The final elimination entry is:

Dr. Sales - Intercompany $150,000
Cr. Cost of Goods Sold - Intercompany $100,000
Cr. Cost of Goods Sold         &n bsp;       $50,000
*Journal entry balances*

Now...let's assume the same example except Company B did not sell any of the merchandise it purchased from Company A.  All of it is still in inventory.  The elimination entry would then be:

Dr. Sales - Intercompany $150,000
Cr. Cost of Goods Sold - Intercompany $100,000
Cr.  Inventory        &nb sp;       $50,000
*Journal entry balances*

Now...let's assume the same example at the very top except Company B has 1/4 of the merchandise it purchased from Company A still in its inventory.  If 1/4 is still in inventory, then 3/4 was sold.  You then take the $50,000 that you need to balance the elimination entry and divide it up between inventory and cost of goods sold based on the fractions.

Cost of Goods Sold -- $50,000 * 3/4 = $37,500
Ending Inventory -- $50,000 * 1/4 = $12,500

The final elimination entry is:

Dr. Sales - Intercompany $150,000
Cr. Cost of Goods Sold - Intercompany $100,000
Cr. Cost of Goods Sold         &n bsp;       $37,500
Cr. Inventory        &nb sp;                 $12,500
*Journal entry balances*

To conclude, your debit will always be Sales - Intercompany.  One of your credits will always be Cost of Goods Sold - Intercompany.  The remaining credit(s) will depend on whether or not the purchasing inter-related company has sold the merchandise.

Let me know if you are confused on a particular step. I can explain further and provide you with a bit more theory to get this to gel for you.

It finally makes sense now. Every step is well explained.  I finally understand how it works. Thank you so so much for your help.

I also want to thank you for posting your tips on studying the material. I'm trying to follow it hopefully it'll work on me :)

Thanks again.

ebonyeyes- Thank you sooooo much, this makes alot more sense to me now. You explained everything in such a simplified way!

I'm going to retake my test next month and I was totally not looking forward to restudying but now I feel alot more motivated to start studying again :)