Up owns 80% of Down. During 2009 Down began selling merchandise to Up at gross profit margin of 20%. Sales by Down to Up for the year totaled $80,000, of which $10,000 remain unsold. In 2010 Down sold $100,000 merchandise to Up at gross margin of 40%. Up’s Ending inventory balance at the end of 2010 is $25,000. Prepare the journal entries for 2009 and 2010 to eliminate and adjust for the intercompany transaction.

Hanna Company borrows $80,000 on July 1 from the bank by signing a $80,000, 10%, one-year note payable.



Correct.

Prepare the journal entry to record the proceeds of the note.
Date Account/Description Debit Credit
July 1




Incorrect.

Prepare the journal entry to record accrued interest at December 31, assuming adjusting entries are made only at the end of the year.
Date Account/Description Debit Credit
Dec. 31

To prepare the journal entries to eliminate and adjust for the intercompany transactions between Up and Down for the years 2009 and 2010, we need to consider the gross profit margin and the ending inventory balances.

For 2009:

1. Eliminating Sales and Cost of Goods Sold:
Since Down sold merchandise to Up, it records the sale and recognizes the cost of goods sold. However, we need to eliminate these entries to reflect the intercompany nature of the transaction.

Journal Entry for Down:
Debit Intercompany Sales - Up: $80,000
Credit Intercompany Cost of Goods Sold - Up: $80,000

Journal Entry for Up:
Debit Intercompany Cost of Goods Sold - Down: $80,000
Credit Intercompany Sales - Down: $80,000

2. Adjusting for remaining inventory:
Since $10,000 of the merchandise sold by Down to Up remains unsold at the end of 2009, we need to adjust for this in the inventory balances.

Journal Entry for Down:
Debit Intercompany Inventory - Up: $10,000
Credit Intercompany Cost of Goods Sold - Up: $10,000

Journal Entry for Up:
Debit Intercompany Cost of Goods Sold - Down: $10,000
Credit Intercompany Inventory - Down: $10,000

For 2010:

1. Eliminating Sales and Cost of Goods Sold:
Similar to 2009, we need to eliminate the intercompany sales and cost of goods sold entries to reflect the intercompany nature of the transaction.

Journal Entry for Down:
Debit Intercompany Sales - Up: $100,000
Credit Intercompany Cost of Goods Sold - Up: $100,000

Journal Entry for Up:
Debit Intercompany Cost of Goods Sold - Down: $100,000
Credit Intercompany Sales - Down: $100,000

2. Adjusting for ending inventory:
Since Up's ending inventory balance is $25,000, we need to adjust for this in the inventory balances.

Journal Entry for Down:
Debit Intercompany Inventory - Up: $25,000
Credit Intercompany Cost of Goods Sold - Up: $25,000

Journal Entry for Up:
Debit Intercompany Cost of Goods Sold - Down: $25,000
Credit Intercompany Inventory - Down: $25,000

These journal entries will help eliminate and adjust for the intercompany transactions between Up and Down for the years 2009 and 2010.