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    Intercompany Sale of Inventory

    Uploaded by

    Audrey Louelle
    1) Intercompany sales of inventory between a parent and subsidiary companies require elimination entries on the consolidation worksheet to eliminate the intercompany profit and properly state the ending inventory balance. 2) Transfers made at cost require eliminating the intercompany sales amount, while transfers made at a profit/loss require further eliminating the unrealized intercompany profit in ending inventory. 3) Downstream sales, where the parent sells to the subsidiary, and upstream sales, where the subsidiary sells to the parent, are treated differently depending on whether the inventory is resold within the period or held until a later period. In either case, unrealized profits must be eliminated.

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    © All Rights Reserved
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    Intercompany Sale of Inventory

    Uploaded by

    Audrey Louelle
    484 views35 pages
    1) Intercompany sales of inventory between a parent and subsidiary companies require elimination entries on the consolidation worksheet to eliminate the intercompany profit and properly state the ending inventory balance. 2) Transfers made at cost require eliminating the intercompany sales amount, while transfers made at a profit/loss require further eliminating the unrealized intercompany profit in ending inventory. 3) Downstream sales, where the parent sells to the subsidiary, and upstream sales, where the subsidiary sells to the parent, are treated differently depending on whether the inventory is resold within the period or held until a later period. In either case, unrealized profits must be eliminated.

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    Intercompany Sale of Inventory

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    1) Intercompany sales of inventory between a parent and subsidiary companies require elimination entries on the consolidation worksheet to eliminate the intercompany profit and properly state the ending inventory balance. 2) Transfers made at cost require eliminating the intercompany sales amount, while transfers made at a profit/loss require further eliminating the unrealized intercompany profit in ending inventory. 3) Downstream sales, where the parent sells to the subsidiary, and upstream sales, where the subsidiary sells to the parent, are treated differently depending on whether the inventory is resold within the period or held until a later period. In either case, unrealized profits must be eliminated.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    484 views35 pages

    Intercompany Sale of Inventory

    Uploaded by

    Audrey Louelle
    1) Intercompany sales of inventory between a parent and subsidiary companies require elimination entries on the consolidation worksheet to eliminate the intercompany profit and properly state the ending inventory balance. 2) Transfers made at cost require eliminating the intercompany sales amount, while transfers made at a profit/loss require further eliminating the unrealized intercompany profit in ending inventory. 3) Downstream sales, where the parent sells to the subsidiary, and upstream sales, where the subsidiary sells to the parent, are treated differently depending on whether the inventory is resold within the period or held until a later period. In either case, unrealized profits must be eliminated.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 35

    Intercompany

    Sales

    Introduction

    Intercompany Sale of
    Merchandise
    PARENT
    u

    SUBSIDIARY 1

    HORIZONTAL

    T
    R
    E
    A
    M

    W
    O
    D

    M
    A
    RE
    T
    NS
    W
    O
    D

    AM
    E
    TR
    S
    N

    SUBSIDIARY 2

    Intercompany Sale of
    Merchandise

    Effect of Intercompany Sale of Merchandise


    on Consolidated Balances

    Transfer at cost

    Transfer at cost

    Transfer at cost
    On the consolidation worksheet, eliminate ALL intercompany
    sales/purchases of inventory in the year of the sale.
    The elimination amount is the amount assigned as the sales
    price of the transfer.

    Purchases component of COGS.

    Transfers at a profit or loss

    Transfers at a profit or loss

    Unrealized Inventory Gains


    Year of Transfer
    Despite the previous entry, ending inventory is still overstated
    by the amount of gain on the inventory that is still unsold at
    year end.
    We must eliminate the unrealized gain as follows:

    Ending Inventory component of COGS.

    Downstream Sale of Inventory

    Downstream Sale of Inventory

    Resale in period of intercorporate transfer

    Downstream Sale of Inventory Illustration

    Peerless Products acquires 80 percent of the common stock of Special


    Foods on December 31, 20X0, for its book value of $240,000. The fair
    value of noncontrolling interest on that date is equal to its book value
    of $60,000. On March 1, 20X1, Peerless buys inventory for $7,000 and
    resells it to Special Foods for $10,000 on April 1.

    Downstream Sale of Inventory Illustration

    Downstream Sale of Inventory Illustration

    This entry does not affect consolidated net income


    No elimination of intercompany profit is needed because all the intercompany
    profit has been realized through resale of the inventory to the external party
    during the current period

    Resale in period following intercorporate transfer

    Downstream Sale of Inventory Illustration


    Using the basic equity method, Peerless records its share of Special Foods
    income and dividends for 20X1 in the normal manner:

    As a result of these entries, the ending


    balance of the investment account is
    $256,000 ($240,000 + $40,000 - $24,000).

    Downstream Sale of Inventory Illustration

    Only entry E(13) relates to the elimination of unrealized inventory profits

    Downstream Sale of Inventory Illustration

    Consolidated Net Income20X1

    Downstream Sale of
    Inventory - Illustration

    During 20X2, Special Foods receives $15,000 when it sells to


    Nonaffiliated Corporation the inventory that it had purchased for
    $10,000 from Peerless in 20X1. Also, Peerless records its pro rata
    portion of Special Foods net income and dividends for 20X2 with the
    normal basic equity-method entries:

    The consolidation workpaper prepared at the end of 20X2 is shown in


    Figure 72 in the text. Four elimination entries are needed:

    Downstream Sale of Inventory Illustration

    Downstream Sale of
    Inventory - Illustration

    Entry E(19) is needed to adjust cost of goods sold to the proper


    consolidated balance and to reduce beginning retained earnings.

    Downstream Sale of Inventory Illustration

    Consolidated Net Income20X2

    Downstream Sale of
    Inventory
    Illustration
    Inventory held two or more periods
    Prior

    to liquidation, an eliminating entry is


    needed in the consolidation workpaper each
    time consolidated statements are prepared to
    restate the inventory to its cost to the
    consolidated entity

    For example, if Special Foods continues to hold the inventory purchased the
    following eliminating entry is needed in the consolidation workpaper each
    time a consolidated balance sheet is prepared for years following the year of
    intercompany sale, for as long as the inventory is held:

    Upstream Sale of Inventory

    When an upstream sale of inventory occurs and the


    inventory is resold by the parent to a nonaffiliate during the
    same period, all the parents equity-method entries and the
    eliminating entries in the consolidation workpaper are
    identical to those in the downstream case

    Upstream Sale of Inventory

    When the inventory is not resold to a nonaffiliate before the


    end of the period, workpaper eliminating entries are
    different from the downstream case only by the
    apportionment of the unrealized intercompany profit to
    both the controlling and noncontrolling interests

    Upstream Sale of Inventory Illustration

    Upstream Sale of Inventory


    - Illustration

    All eliminating entries are the same in the upstream case as in the
    downstream case except for entry E(24).
    Refer Figure 7-3 in the text for the Consolidation Workpaper.

    Upstream Sale of Inventory Illustration

    Consolidated Net Income20X1

    Upstream Sale of Inventory Illustration

    As in the downstream illustration, the investment account balance at


    the end of 20X2 is $284,000.
    The consolidation workpaper used to prepare consolidated financial
    statements at the end of 20X2 appears in Figure 74 in the text.

    Upstream Sale of Inventory Illustration

    Workpaper entry E(32) deals explicitly with the elimination of the


    inventory profit on the upstream sale.

    Upstream Sale of Inventory Illustration

    Consolidated Net Income20X2

    5-34

    Intercom
    pany
    Inven
    - 34

    5-35

    Unrealized Inventory Gains


    Effect on Noncontrolling Interest
    Noncontrolling
    NoncontrollingInterest
    Interestin
    inSub
    SubNet
    NetIncome
    Income==the
    thenoncontrolling
    noncontrolling%
    %of
    ofthe
    the
    subs
    subsnet
    netincome,
    income,AFTER
    AFTEReliminating
    eliminatingUPSTREAM
    UPSTREAMunrealized
    unrealizedintercompany
    intercompany
    profit.
    profit.

    Intercom
    pany
    Inven
    - 35

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