Reference no: EM132472319
Comprehensive Intercompany Transactions MC Enterprises began business some years ago as a franchiser of fast food restaurants known as The Mighty Chicken. Initially, all franchises were indepen¬dently ownal, but eventually the company began to buy individual franchises from owners who wanted to sell. MC Enterprises formed a wholly-owned subsidiary, Mighty Chicken Shops, to own and operate these repurchased franchises. Currently, there are 46 independently owned franchises, and 33 compim} owned franchises held by the subsidiary.
Following are condensed trial balances for MC Enterprises (the parent) and Mighty Chicken Shops (the subsidiary) at December 31, 2019:
|
|
Dr (Cr)
|
|
|
MC Enterprises
|
Mighty
Chicken Shops
|
|
Investment in Mighty Chicken Shops....................................
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$ 5.000.000
|
S -
|
|
Other assets.............................................................................
|
78,000,000
|
56,000.000
|
|
liabilities................................................................................................................................
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(23,000,000)
|
(43,000.000)
|
|
Shareholders' equity, January 1...........................................
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(46.000.000)
|
(7.000.000)
|
|
Sales revenue...........................................................................
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(140,000,000)
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(89,000,000)
|
|
Franchise fee revenue ............................................................
|
(16000.000)
|
-
|
|
Interest reverwe..................................................................................................................
|
(6,000,000)
|
-
|
|
Cost of goods sold..................................................................
|
98,000.000
|
57.000.000
|
|
Franchise fee expense..............................................................
|
|
8,000.000
|
|
Interest expense......................................................................
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3.000.000
|
4.000.000
|
|
Operating expenses (Inducing depreciation).........................................
|
46,000,000
|
14,000.000
|
|
Totals.......................................................................................
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0
|
0
|
|
|
|
Point 1: Mighty (Thicken Shops' cost of goods sold of $57,000,000 consisted of beginning inventory of $10,000,000, purchases of $60,000,000, and ending inventory of $13,000,000. The subsidiary makes all of its purchases from the parent; the transfer price includes a 20 percent gross margin on sales for MC Fn¬terraises. The gross margin percentage has been constant for several years.
Point 2: All of Mighty Chicken Shops' franchise fees and interest expense were paid to MC Enterprises and all of the subsidiary's debt is owed to the parent. MC Enterprises provides equipment at cost to all its franchises, including those owned by Mighty thicken Shops. The subsidiary currently has such equipment originally costing S20.000,000. On average, the equipment has a ten-year life and is currently half depreciated.
Required
Question 1: Prepare appropriate consolidation eliminating entries (I) and (E) at December 31. 2019. There is no need to reverse equity in net income, as the parent did not record it. There are no revaluations since MC Enter¬prises formed Mighty Chicken Shops rather than acquiring it. Mighty Chicken Shops paid no dividends in 2019.