Deferred Taxes and Intercompany Sales of Inventory (Upstream)
Pasco Company owns 75% of Shank Company. Pasco Company sells merchandise to Shank Company at 20% above cost. During 2004 and 2005, such sales amounted to $450,000 and $486,000, respectively. At the end of each year, Shank Company had in its inventory one-third of the amount of goods purchased from Pasco during that year. Marginal income tax rates for both companies are 40%. LO5 Required:
Assume that the companies file separate income tax returns. Prepare the workpaper entries necessary to eliminate the effects of the intercompany sales for 2004 and 2005.