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Intercompany Profit Transactions – Inventories. Intercompany Inventory Transactions. Revenue Recognition. Revenue on sales between affiliated companies cannot be recognized until merchandise is sold outside of the consolidated entity. Intercompany Inventory Transactions. Purchasing Agent. - PowerPoint PPT Presentation
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1©2009 Accounting Department, University Of Siliwangi
Intercompany ProfitTransactions – Inventories
2©2009 Accounting Department, University Of Siliwangi
Intercompany Inventory Transactions
Revenue on sales between affiliated companiescannot be recognized until merchandise is sold
outside of the consolidated entity.
3©2009 Accounting Department, University Of Siliwangi
Intercompany Inventory Transactions
Periodicinventory
system
Sales
Purchases
Perpetualinventory
system
Sales
Cost of goods sold
4©2009 Accounting Department, University Of Siliwangi
Elimination of IntercompanyPurchases and Sales
Pint formed a subsidiary, Shep Corporation.
All Shep’s purchases are made fromPint at 20% above Pint’s cost.
Pint sold $20,000 of merchandiseto Shep for $24,000.
Shep sold all the merchandiseto its customers for $30,000.
5©2009 Accounting Department, University Of Siliwangi
Elimination of IntercompanyPurchases and Sales
Inventory 20,000Accounts Payable 20,000
To record purchases on account from other entities
Accounts Receivable 24,000Sales 24,000
To record intercompany sales to Shep
6©2009 Accounting Department, University Of Siliwangi
Elimination of IntercompanyPurchases and Sales
Cost of Sales 20,000Inventory 20,000
To record cost of sales to Shep
Investment 6,000Income from Shep 6,000
To record related equity interest
7©2009 Accounting Department, University Of Siliwangi
Elimination of IntercompanyPurchases and Sales
Inventory 24,000Accounts Payable 24,000
To record intercompany purchases from Pint
Accounts Receivable 30,000Sales 30,000
To record sales to outside customers
8©2009 Accounting Department, University Of Siliwangi
Elimination of IntercompanyPurchases and Sales
Cost of Sales 24,000Inventory 24,000
To record cost of sales to customers
9©2009 Accounting Department, University Of Siliwangi
Elimination of IntercompanyPurchases and Sales
100% Adjustments and Consol-Pint Shep Eliminations idated
Sales
Cost of sales
Gross profit
$24,000
20,000
$ 4,000
$30,000
24,000
$ 6,000
a 24,000
a 24,000
$30,000
20,000
$10,000
10©2009 Accounting Department, University Of Siliwangi
Elimination of UnrealizedProfit in Ending Inventory
During 2004, Pint sold merchandise thatcost $30,000 to Shep for $36,000.
Shep sold all but $6,000 of thismerchandise to its customers for $37,500.
11©2009 Accounting Department, University Of Siliwangi
Shep’s inventory $6,000Cost to Pint –5,000Unrealized profit in EI $1,000
Elimination of UnrealizedProfit in Ending Inventory
30,000 ÷ 36,000 = 5/6
5/6 × 30,000 = $25,000
1/6 × 36,000 = $6,000
1/6 × 30,000 = $5,000
12©2009 Accounting Department, University Of Siliwangi
Elimination of UnrealizedProfit in Ending Inventory
Adjustments and Consol-Pint Shep Eliminations idated
Sales
Cost of sales
Gross profit
Inventory
$36,000
30,000
$ 6,000
$37,500
30,000
$ 7,500
$ 6,000
a 36,000
b 1,000 a 36,000
b 1,000
$37,500
25,000
$12,500
$ 5,000
13©2009 Accounting Department, University Of Siliwangi
Recognition of UnrealizedProfit in Beginning Inventory
During 2005 Pint sold merchandisethat cost $40,000 to Shep for $48,000.
Shep sold 75% of this merchandiseto its customers for $45,000.
Shep also sold its beginning inventorywith a transfer price of $6,000 for $7,500.
14©2009 Accounting Department, University Of Siliwangi
Recognition of UnrealizedProfit in Beginning Inventory
25% × 48,000 = $12,000 Ending inventory
Shep’s inventory $12,000Cost to Pint (10,000)Unrealized profit in EI $ 2,000
$12,000 ÷ 1.2 = $10,000 EI transfer price
15©2009 Accounting Department, University Of Siliwangi
Recognition of UnrealizedProfit in Beginning Inventory
$7,500 – $5,000 BI = $2,500 from BI
75% × 48,000 = $30,000
$45,000 – $30,000 = $15,000
$15,000 + $2,500 = $17,500
16©2009 Accounting Department, University Of Siliwangi
Recognition of UnrealizedProfit in Beginning Inventory
Adjustments and Consol-Pint Shep Eliminations idated
Sales
Cost of sales
Gross profit
InventoryInvestmentin Shep
$48,000
40,000
$ 8,000
XXX
$52,500
42,000
$10,500
$12,000
a 48,000
c 2,000 a 48,000b 1,000
c 2,000
b 1,000
$52,500
35,000$17,500
$10,000
17©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Sales
Sales from topto bottom aredownstream.
Sales frombottom to topare upstream.
Parentto
Subsidiary Subsidiaryto
Parent
18©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Sales
In downstream sales, the parent company’sseparate income includes the full amount ofany unrealized profit, and the subsidiary’s
income is not affected.
In upstream sales, the subsidiary company’snet income includes the full amount of anyunrealized profit, and the parent company’s
separate income is not affected.
19©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Effectson Income Computations
80%-ownedParent Subsidiary
Sales $600 $300Cost of sales 300 180
Gross profit $300 $120Expenses 100 70
Parent’s separate income $200Subsidiary’s net income $ 50
20©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Effectson Income Computations
Intercompany sales during the year are $100,000.
The December 31 inventory includes$20,000 unrealized profit.
21©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Effectson Income Computations
The parent company’ssales and cost of sales
accounts reflect the$20,000 unrealized profit.
The $50,000subsidiary net
income equals itsrealized income.
22©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Effectson Income Computations
The subsidiary’s sales andcost of sales accounts reflectthe $20,000 unrealized profit.
The subsidiary’srealized income
is $30,000.
23©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Effectson Income Computations
Consolidated Income (000) Downstream Upstream
Sales ($900 – $100) $800 $800Cost of sales ($480 + $20 – $100) 400 400
Gross profit $400 $400Expenses ($100 + $70) 170 170
Total realized income $230 $230Less: Minority interest 10 6
Consolidated net income $220 $224
24©2009 Accounting Department, University Of Siliwangi
Downstream and Upstream Effectson Income Computations
Consolidated Income (000) Downstream Upstream
Parent’s separate income $200 $200Add: Income from subsidiary:Equity in subsidiary’s income less unrealized profit [($50,000 × 80%) – $20,000] 20Equity in subsidiary’s income [($50,000 – $20,000) × 80%] 24 Parent and consolidated net income $220 $224
25©2009 Accounting Department, University Of Siliwangi
Deferral of Intercompany Profitin Period of Sale: Downstream
90%-ownedPorter Sorter
Sales $100 $50Cost of sales 60 35
Gross profit $ 40 $15Expenses 15 5
Operating income $ 25 $10Income from Sorter 9 –
Net income $ 34 $10
26©2009 Accounting Department, University Of Siliwangi
Deferral of Intercompany Profitin Period of Sale: Downstream
Porter’s sales include $15,000 to Sorterat a profit of $6,250.
Sorter’s December 31, 2003, inventory includes40% of the merchandise from this transaction.
27©2009 Accounting Department, University Of Siliwangi
Deferral of Intercompany Profitin Period of Sale: Downstream
$15,000 – $6,250 = $8,750
$8,750 × 40% = $3,500
$15,000 × 40% = $6,000
$6,000 – $3,500 = $2,500
28©2009 Accounting Department, University Of Siliwangi
Deferral of Intercompany Profitin Period of Sale: Downstream
Investment in Sorter 9,000Income from Sorter 9,000
To record share of Sorter’s income
Income from Sorter 2,500Investment in Sorter 2,500
To eliminate unrealized profit on sales to Sorter
29©2009 Accounting Department, University Of Siliwangi
Partial Working PapersDecember 31, 2003
Adjustments/ Consol-Porter Shorter Eliminations idated
Income StatementSalesIncome from SorterCost of goods soldExpensesMinority interest expense ($10,000 × 10%)Net incomeBalance SheetInventoryInvestment in Sorter
$100 6.5 (60) (15)
$ 31.5
XXX
$50
(35) (5)
$10
$ 7.5
Dr. Cr.a 15c 6.5b 2.5 a 15
b 2.5 c 6.5
$135
(82.5) (20)
(1)$ 31.5
$ 5
30©2009 Accounting Department, University Of Siliwangi
Recognition of Intercompany Profitupon Sale to Outside Entities
Now assume that the merchandise acquired fromPorter during 2003 is sold by Sorter during 2004.
There are no intercompany transactionsbetween Porter and Sorter during 2004.
31©2009 Accounting Department, University Of Siliwangi
Recognition of Intercompany Profitupon Sale to Outside Entities
90%-ownedPorter Sorter
Sales $120 $60Cost of sales 80 40
Gross profit $ 40 $20Expenses 20 5
Operating income $ 20 $15Income from Sorter 13.5 –
Net income $ 33.5 $15This is before considering $2,500 unrealized profit in BI.
32©2009 Accounting Department, University Of Siliwangi
Recognition of Intercompany Profitupon Sale to Outside Entities
Investment in Sorter 13,500 Income from Sorter 13,500To record investment income from Sorter
Investment in Sorter 2,500 Income from Sorter 2,500To record realization of profit fromintercompany sales to Sorter
33©2009 Accounting Department, University Of Siliwangi
Partial Working PapersDecember 31, 2003
Adjustments/ Consol-Porter Shorter Eliminations idated
Income StatementSalesIncome from SorterCost of goods soldExpensesMinority interest expense ($15,000 × 10%)Net incomeBalance SheetInvestment in Sorter
$120 16 (80) (20)
$ 36
XXX
$60
(40) (5)
$15
Dr. Cr.
b 16 a 2.5
a 2.5 b 16
$180
(117.5) (25)
(1.5)$ 36
34©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream SalesSeay Corporation is a 90%-owned
subsidiary of Peak Corporation,acquired for $94,500 cash on July 1, 2003.
Seay’s net assets at date of acquisitionconsisted of $100,000 capital stock
and $5,000 retained earnings.
The cost of Peak’s 90% interest was equal to bookvalue and fair value of the interest acquired.
35©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
Cost: $105,000 × 90% = $94,500
Minority interest: $105,000 × 10% = $10,500
36©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
Peak sells inventory items to Seay on a regular basis.
Sales to S in 2007 (cost $15,000), selling price $20,000Unrealized profit in S’s inventory at 12/31/2006 2,000Unrealized profit in S’s inventory at 12/31/2007 2,500Seay’s accounts payable to Peak 12/31/2007 10,000
37©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
At 12/31/2006 Peak’s investment in Seayaccount had a balance of $128,500.
This balance consisted of Peak’s 90%equity in Seay’s $145,000 net assets onthat date less $2,000 unrealized profit
in Seay’s 12/31/2006 inventory.
38©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
$145,000 × 90% = $130,500
$130,500 – $2,000 = $128,500
39©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
Seay’s equity:Common stock $100,000Retained earnings 45,000Net assets $145,000
$45,000 – $5,000 = $40,000 increase in RE
$40,000 – $4,000 (minority interest) = $36,000
40©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream SalesDuring 2007, Peak made the following entries
on its books for the investment in Seay:
Cash 9,000Investment in Seay 9,000
To record dividends from Seay ($10,000 × 90%)
Investment in Seay 26,500Income from Seay 26,500
To record income from Seay for 2007
41©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
Equity in Seay’s net income: ($30,000 × 90%) $27,000Add: Inventory profits recognized in 2007 2,000Deduct: Inventory profits deferred at year end – 2,500Total $26,500
42©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
Peak’s Investment 94,500 36,000128,500 2,000 27,000
146,000
2,000
2,5009,000 Dividends
12/31/2006
12/31/2007
43©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Downstream Sales
Minority Interest
1,000
10,500 4,00014,500 3,000
16,500 12/31/2007Dividends
12/31/2006
44©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Upstream SalesSmith Corporation is an 80%-owned subsidiary
of Poch Corporation, acquired for $480,000cash on January 2, 2003.
Smith’s stockholders’ equity consisted of$500,000 capital stock and $100,000
retained earnings.
The cost of Poch’s 80% interest was equal tobook value and fair value of the interest acquired.
45©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Upstream Sales
Smith sells inventory items to Poch on a regular basis.
Sales to P in 2004 $300,000Unrealized profit in P’s inventory at 12/31/2003 40,000Unrealized profit in P’s inventory at 12/31/2004 30,000Intercompany A/R and A/P at 12/31/2004 50,000
46©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Upstream Sales
At December 31, 2003, Poch’s investment inSmith had an account balance of $568,000.
This balance consisted of $600,000 underlyingequity in Smith’s net assets ($750,000 × 80%)
less $32,000 unrealized profit in Poch’sDecember 31, 2003, inventory.
47©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Upstream SalesDuring 2004, Poch made the following entries
on its books for the investment in Smith.
Cash 40,000Investment in Smith 40,000
To record dividends from Smith ($50,000 × 80%)
Investment in Smith 88,000Income from Smith 88,000
To record income from Smith for 2004
48©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Upstream Sales
Equity in Smith’s net income ($100,000 × 80%) $80,000Add: 80% of $40,000 unrealized profit
deferred in 2003 32,000Less: 80% of $30,000 unrealized profit
at December 31, 2004 –24,000Total $88,000
49©2009 Accounting Department, University Of Siliwangi
Consolidation Example – Intercompany
Profits: Upstream Sales
Poch’s Investment480,000Income568,000 32,000 80,000616,000
32,00040,00024,000
Dividends12/31/2003
12/31/2004