Intercompany Entries

11 Intercompany Transactions - Heading

Chapter 4 Intercompany Transactions

Affiliated Cos do business with each other E.g., S sells merchandise to P

Books of P & S fully reflect transactionsB k h ll f th l j l t i

2 Parent & Subsidiary Shown As 1 Company in Consolidation Financial Statements

Books have all of the regular journal entries E.g., books have:

S has A/R from P P has A/P to S

In Consolidation P & S are shown as 1 Co. E.g., Must eliminate intercompany accounts (A/R & A/P)E.g., Must eliminate intercompany accounts (A/R & A/P)

Because one Co doesnt not owe $ to itself

These WS entries same regardless of accounting method Cost, Simple Equity or Sophisticated Equity Methods

3 Intercompany Sales of Merchandise - Heading

Intercompany Sales of Merchandise

4 Intercompany Sales of Merchandise E.g. - #1

Assume P sells inventory to S Inv orig cost $1,000 Inv sold by P to S for $1,200 Inv sold by S for $1,500 to 3rd partyy , p y

W/O eliminations Total Sales & Total COGS too high

S P TotalSales $1,500 $1,200 $2,700

L COGS 1200 1000 2200Less: COGS 1200 1000 2200

Gross Profit $300 $200 $500

25 Intercompany Sales of Merchandise E.g. - #2

Consolidation shows P & S as 1 Co Need to eliminate intercompany sale

Get rid of $1,200 transfer priceGet rid of $1 200 COGS based on intercompany sale Get rid of $1,200 COGS based on intercompany sale

If you do this:

Sales $1,500 ($1500 sale to 3rd party)

Less: COGS 1000 ($1000 original cost to Parent)Less: COGS 1000 ($1000 original cost to Parent)

Gross Profit $500

This is done in IS entry IS stands for Intercompany Sale

6 Worksheet Entry Intracompany Sale of Merchandise E.g. - #3

IS D. Sales Revenue (1st Seller) $1,200IS C. Cost of Goods Sold (2nd Seller) $1,200

7 IA Entry

If intercompany sale is credit sale: Must eliminate A/R & A/P

Called Intercompany Accounts

Reporting as if P & S are 1Co Reporting as if P & S are 1Co You dont owe $ to yourself

Use End of Year Balance of A/R&A/P

IA D. Accounts Payable (2nd Seller) $1,200y ( ) ,IA C. Accounts Receivable (1st Seller) $1,200

8 Division of Profit From Sale of Merchandise Inventory - #2

In E.g. $500 profit Who gets it? Intercompany price divides it between P & S

P gets $200 of profit ($1200 -$1000) &P gets $200 of profit ($1200 -$1000) & S gets $300 of profit ($1500 - $1200)

$1,200 price used to divide $500 profit between P&S:

S P TotalSales $1,500 $1,200 $2,700

Less: COGS 1200 1000 2200



These WS entries are the same regardless of whether you have a NCI

You are presenting both P&S as if they are 1 Co.Th i t f NCI d t h thi The existence of NCI doesnt change this

It only affects who gets equity

10 EI Entry - Heading

EI Entry

No real sale unless you have sale to 3rd party (unrelated)

Without sale to 3rd party

11 Need Sale to Unrelated Third Party

Without sale to 3rd party Really just moving inventory from sellers to

buyers place of business Reporting as if 1 Co

You cant sell something to yourselfd No rev recognized unless ultimate sale to 3rd

party


S P TotalSales $1,500 $1,200 $2,700

Less: COGS 1200 1000 2200

d $

Less: COGS 1200 1000 2200


NotBooked

Booked

If no sale to 3rd party P has taken $200 profit on its books

We want to delay $200K profit until S sells inv to 3rd Party

4BIG PICTURE: Until sale to 3rd party GAAP requires

Seller does not recognizes profit from

13 Defer Profit Until Sale to Third Party

intercompany sale Intercompany profit deferred (suspended)

until sale to 3rd party Inventory reduced to orig cost

After sale to 3rd partyAfter sale to 3 party P & S then report their share of profit on sale

of merchandise

If merchandise not sold to 3rd party in 1st year: 1st, do WS entries as if sale to outsider:

Same as before

14 EI Entry - #1

IS D. Sales Revenue (1st Seller) $1,200IS C. Cost of Goods Sold (2nd Seller) $1,200IA D. Accounts Payable (2nd Seller) $1,200IA C. Accounts Receivable (1st Seller) $1,200

15 EI Entry - #2

Then, We need to: Eliminate markup from inventory

Credit Inventory for amount of Sellers deferred profit

Eliminate Sellers profit:p Debit COGS for amount of Sellers deferred profit

An increased COGS reduces profit Allocate increased exp (COGS) to 1st Seller

Done in EI Entry EI stands for Ending Inventory

It suspends on WS (not books of P&S) the profit from the

EI D. Cost of Goods Sold $200EI C. Inventory $200

It suspends on WS (not books of P&S) the profit from the 1st sale (and the corresponding mark up of inv) until after the inv is sold in the 2nd sale.

16 EI entry E.g., - #101

E.g., Assume P buys inv for $10,000 P sells inv to S for $15,000 on credit

50% Mark Up

S does not sell inv to 3rd party in 1st year We do the following on the WS

IS D. Sales Revenue $15,000IS C. Cost of Goods Sold $15,000IA D. Accounts Payable $15,000IA C. Accounts Receivable $15,000

517 EI Entry E.g., - #102

S has all of inv at end of year EI entry

Defers Ps profit

EI D. Cost of Goods Sold $5,000EI C Inventory $5 000

Done with debit to COGS

Reduces cost of inv to orig cost Done with credit to Inv

EI C. Inventory $5,000

18 EI Entry E.g., - #102

Intercompany Sale D A/R 15000 Sellers Books-- Revenue C Sales 15000 Sellers BooksIntercompany Sale D COGS 10000 Sellers Books-- COGS C Inv 10000 Sellers Books

WS entries eliminate effects of intercompany sale

COGS C Inv. 10000 Seller s BooksIntercompany Sale D Inv. 15000 Buyers Books-- Purchase Inventory C A/P 15000 Buyers BooksIS Entry D Sales 15000 WS

C COGS 15000 WSIA Entry D A/P 15000 WS

C A/R 15000 WSC A/R 15000 WSEI Entry D COGS 5000 WS

C Inv 5000 WS

After these entries NOTHING LEFT OF INTERCOMPANY SALE

19 EI entry E.g., - #201

What if S sold half of the inventory Half is still unsold.

E.g., Assume P buys inv for $10,000 P sells inv to S for $15,000 on credit

50% Mark Up

S sells of inv to 3rd party in 1st year for $10,000 on credit

IS D. Sales Revenue $15,000IS D. Sales Revenue $15,000IS C. Cost of Goods Sold $15,000IA D. Accounts Payable $15,000IA C. Accounts Receivable $15,000

20 EI Entry E.g., - #202

S has of inv at end of year EI entry

Defers Ps profit on unsold of inv

EI D. Cost of Goods Sold $2,500EI C Inventory $2 500

Done with debit to COGS

Reduces cost of of inv to orig cost Done with credit to Inv

EI C. Inventory $2,500

621 EI Entry E.g., - #203

If of intercompany merchandise is sold to 3rdparty for $10,000 Sales Rev should be $10,000

This is the sale to the 3rd party real sale

A/R should be $10,000 This is the amount owed by 3rd party real A/R

COGS should be $5,000 This is the original cost of the inventory sold to 3rd party

of orig cost ($10,000/2)g ( )

Inv should go down by $5,000 This is the original cost of the inventory sold to 3rd party

of orig cost

22 Intercompany Sale D A/R 15000 Sellers Books-- Revenue C Sales 15000 Sellers BooksIntercompany Sale D COGS 10000 Sellers Books-- COGS C Inv. 10000 Sellers BooksIntercompany Sale D Inv. 15000 Buyers Books-- Purchase Inventory C A/P 15000 Buyers Books3rd P t S l D A/R 10000 B B k3rd Party Sale D A/R 10000 Buyers Books-- Revenue C Sales 10000 Buyers Books3rd Party Sale D COGS 7500 Buyers Books-- COGS C Inv. 7500 Buyers BooksIS Entry D Sales 15000 WS

C COGS 15000 WSIA Entry D A/P 15000 WS

C A/R 15000 WSEI Entry D COGS 2500 WS

C Inv 2500 WS

After you are done with these entries: Sales Rev $10K increase; A/R $10K increase COGS $5,000 increase; Inv $5,000 decrease


If P is intercompany seller Nothing wrong with Ss inc

Income Distribution Schedule of WS:

Subsidiary Income DistributionInternally generated net income $50,000

Adjusted income $50,000NCI share 20%

NCI $10,000


If P is intercompany seller & no sale to 3rd party Ps inc has intercompany profit which must be deferred

Done with EI entry Increase in COGS fro EI entry reduces profits on WS

Parent Income DistributionUnrealized profit in ending inventory

$5000 Internally generated net income

$100,000

Given to intercompany seller in Income Distribution Schedule

80% of Sub adjusted income of $50,000

40,000

Controlling Interest $135,000

725 BI Entry - Heading

BI Entry

26 BI Entry - #1

What about the next year? If intercompany merchandise is sold to 3rd party Now, intercompany seller can take deferred profit

PROBLEM ll t k d f d i t PROBLEM seller took deferred intercompany profit last year on its books So, deferred intercompany profit is already reported in

1st sellers RE 1st need to eliminate deferred intercompany

profit from 1st sellers beginning REprofit from 1st seller s beginning RE 2nd give 1st seller deferred intercompany profit

this year

27 BI Entry - #2

WS entry called BI for Beginning Inventory Debit to RE reduces beginning balance of RE

When P gets deferred profit that will i RE t d f thiincrease RE at end of this year

Credit to COGS increases profits Given to intercompany seller Gives intercompany seller profit deferred

from previous year

BI D. Retained Earnings $5,000

BI C. Cost of Goods Sold $5,000

28 BI Entry Income Distribution Schedule - #1

If P is intercompany seller Nothing wrong with Ss inc

I Di t ib ti S h d l f WS


Adjusted income $50,000

Income Distribution Schedule of WS:

NCI share 20%

NCI $10,000

829 BI Entry Income Distribution Schedule - #2

Assume P gets deferred profit from last year - $5K

BI Entry

Parent Income DistributionInternally generated net income $100,000

Deferred Profit In Beginning Inventory

5,000

80% of Subsidiary adjusted $

40,000income of $50,000


30 Intercompany Sales of Merchandise Miscellaneous Issues - Heading

Intercompany Sales of Merchandise Miscellaneous Issues Miscellaneous Issues


Controlling Interest vs. Non-Controlling InterestNon-Controlling Interest


Remember that intercompany price divides it between P & S P gets $200 of profit ($1200 -$1000) & S gets $300 of profit ($1500 - $1200)g p ( )

S P TotalSales $1,500 $1,200 $2,700

Less: COGS 1200 1000 2200

Gross Profit $300 $200 $500Gross Profit $300 $200 $500

9 This is important if NCI NCI gets share of Ss profit NCI gets none of Ps profit


NCI gets none of P s profit

34 If Subsidiary is Intercompany Seller - #1

BI D. Retained Earnings $5,000BI C. Cost of Goods Sold $5,000

When P is intercompany seller

BI entry has debit to RE:

When P is intercompany seller Use Ps RE

When 100% owned S is intercompany seller Use Ps RE

When S (with NCI) is intercompany seller Use Ps RE for CI share of deferred profit Use Ss remaining RE for NCI share of deferred profit

35 If Subsidiary is Intercompany Seller - #1

E.g., If P owns 80% of S, then split debit to RE:

BI D. Retained Earnings, Parent (80%) $4KRetained Earnings, Sub. (20%) 1K

BI C. Cost of Goods Sold $5K


Intercompany Sales of Merchandise At LossAt Loss

10

37 Periodic Inventory System

What if intercompany sale produces a loss If inventory really dropped in value

I t ll i l Intercompany seller can recognize loss Can recognize loss w/o sale using LCM anyway

If the loss is artificial Loss is deferred until sale to 3rd party

38 Intercompany Sales of Non-Depreciable Asset - Heading

Intercompany Sales of Non-Depreciable Asset (Land)Depreciable Asset (Land)

39 Intercompany Sales of Non-Depreciable Asset - #1

Intercompany sale of non-depreciable asset (Land) gain deferred until asset sold to unrelated 3rdgain deferred until asset sold to unrelated 3

party If asset never sold, deferral is permanent WS entry called LA Entry

LA stands for Land or Land Adjustment


1st Year Debit for gain defers intercompany sellers gain Credit eliminates mark-up (intercompany profit) from

LA D. Gain on Sale of Land $Mark-Up

Credit eliminates mark up (intercompany profit) from cost of Land

Returns Land to its original cost

LA C. Land $Mark-Up

11


Later Years If P is intercompany seller

LA D. Retained Earnings, Parent $Mark-Up

LA C. Land $Mark-Up

This WS entry done each year until Land is sold to 3rd party


Year where Land sold to 3rd party Still need to take it out of sellers RE

Doesnt belong there YETD bit RE

LA D. Retained Earnings, Parent $Mark-Up

Debit RE

Allow intercompany seller to take profit Credit to Gain

g p

LA C.Gain on Intercompany

Sale of Land$Mark-Up

43 Intercompany Sales of Depreciable Assets - Heading

Intercompany Sales of Depreciable AssetsAssets

44 Intercompany Sales of Depreciable Asset - #1

Gains from Intercompany sale of depreciable assets are similar to Land Gain deferred until asset sold to unrelated 3rdGain deferred until asset sold to unrelated 3

party Write down asset back to orig cost.

Also need to undo depreciation taken on buyers books for mark-up

A t i b b k t hi h l Asset is on buyers books at higher value It is producing too much depreciation

Need to undo that extra depreciation exp

12

45 F1 Worksheet Entry

There are two FA entries First we eliminate the intercompany gain on the

FA1 D. Gain on Sale of Machinery

$10,000

FA1 C Machinery $10 000

sale of the machinery:

FA1 C. Machinery $10,000

46 F2 Worksheet Entry

Next, eliminate the increased depreciation expense on the machinery Just depreciation on the mark-up

FA2 D. Accumulated Depreciation $2,000

FA2 C. Depreciation Expense $2,000

p p

This WS entry reduces expenses reported on This WS entry reduces expenses reported on buyers books

It creates income on the WS (consolidation level)

Who gets this income?

47 Effect of Undoing Depreciation of Mark-Up - #1

We give extra income to seller 1st year seller loses gain 1st & later years seller gets increased 1st & later years seller gets increased

income Eventually, seller gets extra income = its

deferred intercompany gain This can be seen in Income Distribution

S h d l f WSSchedules of WS


Subsidiary Income DistributionI ll d i $25 000Internally generated net income $25,000


NCI share 20%

NCI $5,000

13


Parent Income DistributionUnrealized gain

on the sale of $10,000 Internally generated

net income$30,000

machine80% of Subsidiary

adjusted income of $25,000

20,000

Gain realized through use of

2,000through use of machine sold to Subsidiary


50 F1 Worksheet Entry Second Year

The FA1 entry in the second year, is as follows Blue area reduces Machinery back to orig cost Yellow area reduces what remains of intercompany

gain

FA1 D. Retained Earnings, Parent $8K

gain Gain now in RE We disallowed $10K, but let seller have $2K more income

Net is 8K

g ,FA1 Accumulated Depreciation $2KFA1 Cr. Machinery $10K

51 F2 Worksheet Entry Second Year

FA2 entry in 2nd year same as 1st:

FA2 D. Accumulated Depreciation $2,000

FA2 C. Depreciation Expense $2,000

52 Income Distribution Schedules Second Year - #1

The Income Distribution Schedules for 2nd year would appear as follows:



NCI h 20%NCI share 20%

NCI $4,800

14

53 Income Distribution Schedules Second Year - #2

Parent Income DistributionI ll d i $50 000Internally generated net income $50,00080% of Subsidiary income of $24K 19,200Gain realized through use of

machine sold to Subsidiary2,000

Controlling Interest $71,200Controlling Interest $71,200

54 F1 Worksheet Entry Third Year

The FA1 entry in the third year, is as follows Blue area reduces Machinery back to orig cost Yellow area reduces what remains of

intercompany gain

A1 R i d E i P $6 000

intercompany gain Gain now in RE We disallowed $10K, but let seller have $4K more

income Net is 6K

FA1 D. Retained Earnings, Parent 1/1/2002

$6,000

FA1 Accumulated Depreciation 4,000

FA1 Cr. Machinery $10,000

55 Intercompany Construction of Depreciable Assets - Heading

Intercompany Construction of Depreciable AssetsDepreciable Assets

56 Intercompany Construction of Depreciable Asset - #1

What if one member of consolidation group constructs asset for affiliated client? Builder is selling depreciable asset to ClientBuilder is selling depreciable asset to Client Do the same entries we just talked about

This subject introduces new entries dealing with the construction period.

15

57 Intercompany Construction of Depreciable Asset - #2

Builder and client are using accounts that are appropriate for two unrelated parties Wrong account names are being usedg g Using account names used by contractor and

client But, we are presenting the two Cos as if

they are 1 Co. We have to change the names of the We have to change the names of the accounts to reflect 1Co building asset for itself

58 Intercompany Construction of Depreciable Asset - Builders entries - #1

Look at the entries made by P&S on their books

S (builder) records cost of construction during 1st year on Ss books:

D. Construction in Progress $200,000C. Payables $200,000

Construction in Progress is the name used by a contractor Asset Under Construction is the name used by

1 year on S s books:

contractor. Asset Under Construction is the name used by a Co building its own Asset

Remember, we are presenting P&S as if one Co.

59 Intercompany Construction of Depreciable Asset - Builders entries - #1A

Builders Balance SheetConst In Prog $200K Payables $200K

`

60 Intercompany Construction of Depreciable Asset Builders Entries - #2

The S (builder) records billings on Ss books:

D. Contracts Receivable $150,000C. Billings on Construction in Progress $150,000

The Billings account is a contra account that reduces the Construction in Progress account.

The Contracts Receivable is an Intercompany Account One Co cannot owe money to itself.

16

61 Intercompany Construction of Depreciable Asset - Builders entries - #2A

Builders Balance SheetConst In Prog $200K Payables $200KBillings -150K

$50K`

$50KContract Rec. 150K

62 Intercompany Construction of Depreciable Asset - Clients entries - #1

D Assets Under Construction $150 000

P (client) also records billings on Ps books:

D. Assets Under Construction $150,000C. Contracts Payable $150,000

Asset Under Construction is the correct name for Co building an asset for itself, but the Amount ($150K) is too small. Contracts Payable is an Intercompany Account.

63 Intercompany Construction of Depreciable Asset - Clients entries - #1A


$50K`


Clients Balance Sheet$ $Asset Und Constr. $150K Contract Pay. $150K

64 LT1 Entry - #1

On WS want to eliminate Intercompany Accounts (A/R & A/P):

LT1 D. Contracts Payable $150,000LT1 C. Contracts Receivable $150,000

Accounts (A/R & A/P):

17

65 LT1 Entry - #1A


$50K`



66 LT2 Entry - #1

Also want to eliminate Construction in Progress account & Billings account

Add unbilled construction cost to Asset Under

LT2 D. Billings on Construction in Progress $150,000LT2 Assets Under Construction 50,000

Add unbilled construction cost to Asset Under Construction.

LT2 C. Construction in Progress $200,000

67 LT2 Entry - #1A


$50K`



Add To Ass Und Constr. 50K$200K

68 End Result of LT1 & LT2 Entries

After LT1 & LT2 entries, left with: $ $200,000 balance in Assets Under Construction, and

Payables of $200,000

18

69 Consolidated Balance Sheet After LT1 & LT2

Consolidated Balance SheetAsset Under Construction $200K Payables $200K

`

70 Builders Intercompany Profit

(NOT ON TEST) Builder might take intercompany profit

(Percentage of Completion Method):

D. Construction in Progress $50K

C. Earned Income on Long-Term Contract $50K

71 LT 3 Entry

If so, eliminate Builders profit on WS:

LT3 D. Earned Income on Long-Term Contract $50KLT3 C. Construction in Progress $50K

72 Intercompany Lending - Heading

Intercompany Lending

19

73 LN1 Entry

If there is intercompany borrowing? Eliminate the Intercompany note:

LN1 D. Notes Payable $10,000LN1 C. Notes Receivable $10,000

Eliminate the Intercompany note:

74 LNs Entry

Eliminate interest receivable and payable:

LN2 D. Interest Payable $400LN2 C. Interest Receivable $400

75 LN1 Entry

Eliminate interest income and expense:

LN3 D. Interest Income $400LN3 C. Interest Expense $400

Documents

Intercompany Entries