Downstream Intercompany Merchandise Transactions

Sketchy Shoes is a subsidiary of Pacific Brands. Pacific routinely sells merchandise to Sketchy at a 25% markup on cost. Information on intercompany merchandise transactions is below (in thousands):

Inventory balance on Sketchys books, purchased from Pacific Brands, January 1, 2017	$ 13,750
Inventory balance on Sketchys books, purchased from Pacific Brands, December 31, 2017	14,575
Total sales revenue recorded by Pacific Brands on merchandise sales to Sketchy in 2017	550,000

Required

a. Prepare the working paper eliminating entries related to these intercompany transactions at December 31, 2017.

Enter answers in thousands.

b. Assume Sketchy sold merchandise acquired from Pacific Brands for $660,000 during 2017. What amounts appear on the separate books of Pacific Brands and Sketchy Shoes, relating to the intercompany merchandise transactions, for sales revenue and cost of goods sold? What are consolidated sales and cost of goods sold? Show how the eliminating entries in part a above adjust the balances reported on the separate books of the two entities to the correct consolidated balances.

Remember to use negative signs with your credit balance answers in the Dr (Cr) columns.

Please include work & explanations! THANK YOU!!!!

Consolidation Journal Description Debit Credit (I-1) To eliminate intercompany profit from Sketchy's beginning inventory (1-2) To eliminate intercompany sales and purchases (1-3) To eliminate intercompany profit from Sketchy's ending inventory Consolidation Working Paper Accounts Taken From Books Eliminations Pacific Brands Sketchy Shoes Dr (Cr) Dr (Cr) Debit Credit (1-2) (1-3) Consolidated Balances Dr (Cr) Sales revenue Cost of goods sold (1-2)