Pecos Athletics and its subsidiary, Stetson Footwear, engage in intercompany transactions as follows:

Pecos sells merchandise to Stetson at a markup of 35% on cost. In 2015, Pecos sold merchandise to Stetson, charging a total of $16,875,000. Although Stetson did not have any merchandise purchased from Pecos in its beginning inventory, it still held $175,500 of this merchandise in its ending inventory. In 2016, Pecos sold another $12,825,000 in merchandise to Stetson. Stetson held $148,500 of this merchandise in its ending inventory.

At the beginning of 2015, Stetson sold machinery with an original cost of $900,000 and accumulated depreciation of $340,000 to Pecos for $700,000. The machinery had a 7-year remaining life.

REQUIRED:

A. For each of the items above, for each year (2015 and 2016), determine the accounts and balances reported in the end of year trial balances of the separate companies and the balances that should be reported in the consolidated accounts. Provide the eliminating entries necessary to convert the separate company balances to consolidated balances.

B. Assume that Pecos sold the machinery to an outside party for $300,000 halfway through 2017. Determine the related balances reported in the separate company trial balances for 2017, the correct consolidated balances, and the eliminating entries needed to convert the separate company balances to consolidated balances.