Ch06 Jeter
Ch06 Jeter
Ch06 Jeter
Accounting
Jeter ● Chaney
Elimination of
Unrealized
Profit on Intercompany
Sales of Inventory
1
Prepared by Sheila Ammons, Austin Community College
Learning Objectives
• Describe the financial reporting objectives for intercompany sales of
inventory.
• Determine the amount of intercompany profit, if any, to be eliminated from
the consolidated statements.
• Understand the concept of eliminating 100% of intercompany profit not
realized in transactions with outsiders, and know the authoritative position.
• Distinguish between upstream and downstream sales of inventory.
• Compute the noncontrolling interest in consolidated net income for upstream
and downstream sales, when not all the inventory has been sold to outsiders.
• Prepare consolidated workpapers for firms with upstream and downstream
sales using the cost, partial equity, and complete equity methods.
• Discuss the treatment of intercompany profit earned prior to the parent-
subsidiary affiliation.
2
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Upstream and Downstream Sales of
Inventory
Company P
Consolidated Entity
Profit (loss) that has not been realized through subsequent sales to
third parties is defined as unrealized intercompany profit (loss) and
must be eliminated in the preparation of consolidated financial
statements.
LO 4 Upstream and downstream sales.
3
Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Effects of Intercompany Sales of Merchandise on
the Determination of Consolidated Balances
• The financial reporting objectives are:
– Consolidated sales include only sales with parties
outside the affiliated group.
– Consolidated cost of sales includes only the cost to
the affiliated group of goods that have been sold to
parties outside the affiliated group.
– Consolidated inventory on the balance sheet is
recorded at its cost to the affiliated group.
Objective is to eliminate the effects of intercompany sales as if they had never
occurred.
1. The “Total” column represents the Sales and COGS booked by Perkins to
record the sale to Sheraton. The Sales amount also represents the cost of
the inventory recorded by Sheraton.
2. The “Resold” column represents intercompany inventory that was resold to
third parties. Portions resold are recorded in COGS.
3. “On Hand” represents intercompany inventory still on hand in the affiliated
group.
* If the complete equity method is used, the debit is to the Investment account.
Sales 486,000
Purchases (Cost of Sales) 486,000
End. Inventory – Cost of Sales 27,000
Inventory – Balance Sheet 27,000
To eliminate intercompany sales and defer (eliminate) unrealized profit in ending
inventory
LO 6 Consolidated workpapers for downstream sales.
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Copyright © 2015. John Wiley & Sons, Inc. All rights reserved.
Intercompany Sales of
Merchandise
Determination of Amount of Intercompany Profit
• Gross profit may be stated either as a percentage of
sales or as a percentage of cost. When stated as a
percentage of cost, it is referred to as “markup”.
Inventory Pricing Adjustments
• The amount of intercompany profit subject to
elimination should be reduced to the extent that the
related goods have been written down by the
purchasing affiliate.
2. Sales 300,000
Purchases (Cost of Sales) 300,000
3. Ending Inventory (Cost of Sales) 15,000
Inventory (Balance Sheet) 15,000
To eliminate intercompany sales and eliminate (defer) unrealized profit in ending
inventory
Eliminations Consolidated
Balance Sheet Paque Segal Debit Credit NCI Balances
Cash $ 93,000 $ 75,000 $ 168,000
(3)
Accounts receivable 319,500 168,750 (1)
(6)
488,250
Inventory 210,000 172,500 15,000 367,500
Investment in Segal 810,000 27,000 837,000 -
Other assets 750,000 630,000 1,380,000
Total assets $ 2,182,500 $ 1,046,250 $ 2,403,750
-
Accounts payable $ 105,000 $ 45,000 $ 150,000
(6)
Other current liabilities 112,500 60,000 172,500
Common stock 1,200,000 750,000 750,000 1,200,000
(4) (6)
Retained earnings 765,000 191,250 589,500 426,000 4,125 788,625
NCI in net assets 4,500 93,000 88,500
92,625 92,625
Total liab. & equity $ 2,182,500 $ 1,046,250 $ 1,371,000 $ 1,371,000 $ 2,403,750