Slide AKT 307 AKL 1 7

(1)

Irwin/McGraw-Hill

Intercompany

Inventory

Transactions

7

Electronic Presentation by

Douglas Cloud

Pepperdine University

(2)

Transactions of Affiliated Companies

• Inventory transactions are the most common

form of intercorporate exchange.

• Significantly, the consolidation procedures

relating to inventory transfers are quite similar

to fixed assets.

• The eliminations ensure that only the historical

cost of the inventory to the consolidated entity

is included in the consolidated balance sheet

when the inventory is still on hand and is

(3)

Transactions of Affiliated Companies

Parent Company

Subsidiary A

Subsidiary

A Subsidiary_B

Subsidiary B

Consolidated Entity

(4)

Aspects of Workpaper Elimination

When intercorporate sales include profits

or losses, there are two aspects of the

workpaper elimination needed in the

period of transfer to prepare consolidated

financial statements.

When intercorporate sales include profits

or losses, there are two aspects of the

workpaper elimination needed in the

period of transfer to prepare consolidated

(5)



Elimination of the income statement effects

of

the intercorporate sale in the period in which the

sale occurs, including

the sales revenue

from the

intercorporate sale and the related

cost of goods

sold

recorded by the transferring affiliate.



Elimination from the inventory

on the balance

sheet

of any profit or loss on the intercompany

sale

that has not been confirmed by resale of the

inventory to outsiders.



Elimination of the income statement effects

of

the intercorporate sale in the period in which the

sale occurs, including

the sales revenue

from the

intercorporate sale and the related

cost of goods

sold

recorded by the transferring affiliate.



Elimination from the inventory

on the balance

sheet

of any profit or loss on the intercompany

sale

that has not been confirmed by resale of the

inventory to outsiders.

Aspects of Workpaper Elimination

(6)

Downstream Sale–Perpetual System

• Consolidated net income must be based on the

realized income of the transferring affiliate.

• Because intercompany profits from

downstream sales are on the books of the

(7)

Downstream Sale -- Perpetual Inventory

PT Anak

Mar. 1 Inventory 7,000,000

Cash 7,000,000

Purchase of inventory.

Mar. 1 Inventory 7,000,000

Cash 7,000,000

Purchase of inventory.

Same Period

(8)

PT Induk

PT Induk PT Anak_{PT Anak}

Downstream Sale -- Perpetual Inventory

PT Induk

Apr. 1 Cash 10,000,000

Sales 10,000,000

Sale of inventory to PT Anak. Apr. 1 Cash 10,000,000

Sales 10,000,000

Apr. 1 Cost of Goods Sold 7,000,000

Inventory 7,000,000 Cost of inventory sold to PT Anak.

Apr. 1 Cost of Goods Sold 7,000,000

Inventory 7,000,000 Cost of inventory sold to PT Anak.

PT Anak

Apr. 1 Inventory 10,000,000

Cash 10,000,000

Purchase of inventory from PT Induk. Apr. 1 Inventory 10,000,000

Cash 10,000,000

Purchase of inventory from PT Induk.

Same Period

(9)

PT Induk

PT Induk PT Anak_{PT Anak}

Downstream Sale -- Perpetual Inventory

Nov. 5, 20X1

Nov. 5 Cash 15,000,000

Sales 15,000,000

Sale of inventory to Nonaffiliated. Nov. 5 Cash 15,000,000

Sales 15,000,000

Sale of inventory to Nonaffiliated.

PT Anak

Nov. 5 Cost of Goods Sold 10,000,000

Inventory 10,000,000 Cost of inventory sold to Nonaffiliated. Nov. 5 Cost of Goods Sold 10,000,000

Inventory 10,000,000 Cost of inventory sold to Nonaffiliated.

Same Period

(10)

Downstream Sale -- Perpetual Inventory

Item PT Induk PT Anak Unadjusted Consolidated Totals Amounts

Sales Rp10,000,000 Rp15,000,000 Rp25,000,000 Rp15,000,000 Cost of goods

sold -7,000,000 -10,000,000 -17,000,000 -7,000,000 Gross profit Rp 3,000,000 Rp 5,000,000 Rp 8,000,000 Rp 8,000,000

20X1

(11)

Downstream Sale -- Perpetual Inventory

Gross profit of Rp8,000,000 is correct from a

consolidated viewpoint, but consolidated sales and cost

of goods sold should be Rp15,000,000 and Rp7,000,000

respectively, rather than Rp25,000,000 and

Rp17,000,000. In the consolidation workpaper, the

intercompany sale must be eliminated.

Gross profit of Rp8,000,000 is correct from a

consolidated viewpoint, but consolidated sales and cost

of goods sold should be Rp15,000,000 and Rp7,000,000

respectively, rather than Rp25,000,000 and

Rp17,000,000. In the consolidation workpaper, the

intercompany sale must be eliminated.

Sales

10,000,000

Cost of goods sold

10,000,000

(12)

Resale in Period Following Transfer

(13)

Basic Equity-Method Entries--20X1

During 20X1, PT Induk records its pro rata portion of PT

Anak’ net income and dividends for 20X1:

During 20X1, PT Induk records its pro rata portion of PT

Anak’ net income and dividends for 20X1:

(9) Investment in PT Anak Stock 40,000,000

Income from Subsidiary

40,000,000

Record equity-method income.

(8) Cash

24,000,000

Investment in PT Anak

Stock

24,000,000

Record dividends from PT Anak.

Rp30,000,000

x .80

Rp50,000,000

x .80

(14)

Income from

Subsidiary 40,000 Dividends

Declared (60,000) (30,000) Investment in

PT Anak 256,000

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

Income from

Declared (60,000) (30,000) Investment in

PT Anak 256,000

An entry is needed to eliminate PT Induk’s

share of PT Anak’ income and dividends. This

entry also eliminates the change in the

investment account for the period.

An entry is needed to eliminate PT Induk’s

share of PT Anak’ income and dividends. This

entry also eliminates the change in the

investment account for the period.

Income from

Subsidiary 40,000 (l0) 40,000

Dividends

Declared (60,000) (30,000) (10) 24,000

Investment in

PT Anak 256,000 (10) 16,000

PT Induk PT Anak Eliminations

(15)

The noncontrolling interest is assigned a pro rata portion of the net income of PT Anak. Also, the noncontrolling stockholders’

share of PT Anak’ dividends is eliminated and the

noncontrolling interest is increased to reflect the excess of PT Anak’ income over its dividends.

Income to controlling Interest Dividends

Declared (60,000) (30,000) 24,000 Noncontrolling

Interest

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

Income to

Non-(11) 10,000 (10,000)

(11) 6,000 (60,000) (11) 4,000

(16)

Retained Earnings,

January 1 300,000 100,000 Investment in

PT Anak 256,000 (10) 16,000

Common

PT Anak 500,000 200,000 Noncontrolling

Interest (11) 4,000

An entry is needed to eliminate the beginning balances of PT Anak’

stockholders’ equity accounts and PT Induk’s investment account. This entry also needs to establish the noncontrolling interest at the beginning of the period.

An entry is needed to eliminate the beginning balances of PT Anak’

stockholders’ equity accounts and PT Induk’s investment account. This entry also needs to establish the noncontrolling interest at the beginning of the period.

,

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(17)

Downstream Sale -- Inventory Not Resold

Sales Rp10,000,000 Rp -0- Rp10,000,000 Rp -0- Cost of goods

sold -7,000,000 -0- -7,000,000 -0- Gross profit Rp 3,000,000 Rp -0- Rp 3,000,000 Rp -0- Inventory Rp -0- Rp10,000,000 Rp10,000,000 Rp7,000,000

20X1

(18)

Sales 400,000 200,000 Cost of Goods

Sold 170,000 115,000 Inventory 100,000 75,000

An entry is required to eliminate the effects of the

intercompany sale of inventory.

An entry is required to eliminate the effects of the

intercompany sale of inventory.

(13) 10,000 590,000

(13) 7,000 278,000 (13) 3,000 172,000

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(19)

Consolidated Net Income--20X1

PT Induk’s separate operating income Rp140,000,000 Less: Unrealized intercompany profit

on downstream inventory sale -3,000,000 PT Induk’s separate realized income Rp137,000,000 PT Induk’s share of PT Anak’ income:

PT Anak’s net income Rp50,000,000

(20)

Basic Equity-Method Entries--20X2

During 20X2, PT Induk records its pro rata portion of PT

Anak’ net income and dividends for 20X2:

During 20X2, PT Induk records its pro rata portion of PT

Anak’ net income and dividends for 20X2:

(15) Investment in PT Anak Stock 60,000,000

Income from Subsidiary

60,000,000

Record equity-method income.

(14) Cash

32,000,000

Investment in PT Anak

Stock

32,000,000

Record dividends from PT Anak.

Rp40,000,000

x .80

Rp75,000,000

x .80

(21)

Income from

Declared (60,000 (40,000) Investment in

PT Anak 284,000

An entry is needed to eliminate the effects

of income from PT Anak and from PT

Induk’s share of dividends.

An entry is needed to eliminate the effects

of income from PT Anak and from PT

Induk’s share of dividends.

(16) 60,000

(16) 32,000

(16) 28,000

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

)

(22)

Income to

Noncontrolling Interest

Dividends

Declared (60,000) (40,000) (16) 32,000

An entry is needed to assign the noncontrolling shareholders their share of income and establish the

20X2 increase in the claim of noncontrolling shareholders on the net assets of PT Anak. An entry is needed to assign the noncontrolling shareholders their share of income and establish the

20X2 increase in the claim of noncontrolling shareholders on the net assets of PT Anak.

Consolidation Workspaper--20X2

(in ‘000)

_{(in ‘000)}

(17)15,000 (15,000)

(17) 8,000 (60,000) (17) 7,000

(23)

A workpaper entry is needed to eliminate the beginning stockholders’ equity balances of PT Anak and PT

Induk’s beginning investment balance.

Retained Earnings,

PT Anak 284,000 (16) 28,000

Common Stock 500,000 200,000 Noncontrolling

Interest (17) 7,000

(18)120,000 420,000

(18)256,000

(18)200,000 500,000

(18) 64,000 71,000

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

(24)

Downstream Sale -- Inventory Not Resold

Sales Rp -0- Rp 15,000,000 Rp15,000,000 Rp 15,000,000 Cost of goods

sold -0- (10,000,000) (10,000,000) (7,000,000) Gross profit Rp -0- Rp 5,000,000 Rp 5,000,000 Rp 8,000,000

20X2

(25)

An entry is required to eliminate

beginning inventory profit.

An entry is required to eliminate

beginning inventory profit.

Cost of Goods

Sold 180,000 160,000 Retained Earnings,

January 1 420,000 120,000 (18)120,000

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

(19) 3,000 337,000

(19) 3,000 417,000

(26)

Consolidated Net Income--20X2

PT Induk’s separate income Rp160,000,000 Realization of deferred intercompany profit 3,000,000 PT Induk’s separate realized income Rp163,000,000 PT Induk’s share of PT Anak’s income:

PT Anak’ net income Rp75,000,000

(27)

If Inventory Held > 2 periods

Retained Earnings

xxx

Inventory

xxx

For Previous PT Induk Case

:

Retained Earnings

3,000,000

(28)

Upstream Sale–Perpetual System

• When an upstream sale of inventory occurs and

the inventory is resold by the parent to a

nonaffiliate during the same period

– All the eliminating entries in the consolidation work

paper are identical to those in the downstream case.

• When the inventory is not resold to a nonaffiliate

before the end of the period

– work paper eliminating entries are different from the

downstream case only by the apportionment of the

(29)

(30)

Basic Equity--Method Entries--20X1

(22) Investment in PT Anak

Stock

40,000,000

Income from Subsidiary

40,000,000

Record equity-method income.

(21) Cash

24,000,000

Investment in PT Anak

Foods Stock

24,000,000

Record dividends from PT Anak.

Rp50,000,000

x .80

Rp50,000,000

x .80

(31)

Consolidation Workpaper--20X1

(in ‘000)

An entry is needed to eliminate the effects

of income from PT Anak and from PT

Induk’s share of dividends.

An entry is needed to eliminate the effects

of income from PT Anak and from PT

Induk’s share of dividends.

Income from

PT Anak 256,000

(23) 40,000

(23) 24,000

(23) 16,000

)

(32)

Income to controlling Interest Dividends

Declared (60,000) (30,000) 24,000 Noncontrolling

Declared (60,000) (30,000) (23) 24,000

Consolidation Workpaper--20X1

(in ‘000)

(33)

-Irwin/McGraw-Hill

Retained Earnings,

PT Anak 256,000 (23) 16,000

Interest (24) 3,400

An entry is needed to eliminate the beginning balances of PT Anak’ stockholders’ equity accounts and PT Induk’s investment

account. This entry also needs to establish the noncontrolling interest at the beginning of the period.

An entry is needed to eliminate the beginning balances of PT Anak’ stockholders’ equity accounts and PT Induk’s investment

account. This entry also needs to establish the noncontrolling interest at the beginning of the period.

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

(34)

An entry is required to eliminate the

intercompany upstream sale of inventory.

An entry is required to eliminate the

intercompany upstream sale of inventory.

Consolidation Workpaper--20X1

(in ‘000)

_{(in ‘000)}

Sales 400,000 200,000 Cost of Goods

Sold 170,000 115,000 Inventory 100,000 75,000

(26)10,000 590,000

(26) 7,000 278,000 (26) 3,000 172,000

(35)

Consolidated Net Income--20X1

PT Induk’s separate operating income Rp140,000,000 PT Induk’s share of PT Anak’

income:

PT Anak’s net income Rp50,000,000 Less: Unrealized intercompany

profit on upstream

tory sale -3,000,000 PT Anak’ realized income Rp47,000,000

(36)

Basic Equity--Method Entries--20X2

(28) Investment in PT Anak

Stock

60,000,000

Income from Subsidiary

60,000,000

Record equity-method income.

(27) Cash

32,000,000

Investment in PT Anak

Stock

32,000,000

Record dividends from PT Anak.

Rp75,000,000

x .80

Rp75,000,000

x .80

(37)

Consolidation Workpaper--20X2

(in ‘000)

An entry is needed to eliminate the effects

of income from PT Anak and from PT

Induk’s share of dividends.

An entry is needed to eliminate the effects

of income from PT Anak and from PT

Induk’s share of dividends.

Income from

PT Anak 284,000

(29) 60,000

(29) 32,000

(29) 28,000

)

(38)

Income to

Dividends

Declared (60,000) (40,000) (29) 32,000

An entry is needed to assign the noncontrolling shareholders their share of income and establish the

20X2 increase in the claim of noncontrolling shareholders on the net assets of PT Anak. An entry is needed to assign the noncontrolling shareholders their share of income and establish the

20X2 increase in the claim of noncontrolling shareholders on the net assets of PT Anak.

(30)15,600 (15,600)

(30) 8,000 (60,000) (30) 7,600

Consolidation Workpaper--20X2

(in ‘000)

(39)

Retained Earnings,

PT Anak 284,000 (29) 28,000

Interest (30) 7,600

(31)120,000 420,000

(31)256,000

(31)200,000 500,000

(31) 64,000

Consolidation Workpaper--20X2

(in ‘000)

_{(in ‘000)}

(40)

Item Debits Credits Consolidated

A workpaper entry is needed to eliminate the beginning inventory profit: Rp3,000,000 x .80 and Rp3,000,000 x

.20.

A workpaper entry is needed to eliminate the beginning inventory profit: Rp3,000,000 x .80 and Rp3,000,000 x

.20.

Cost of Goods

Sold 180,000 160,000 Retained Earnings,

January 1 420,000 120,000 (31) 120,000

Noncontrolling

Interest (30) 7,600 (31) 64,000

(32) 3,000 337,000

(32) 2,400 417,600 (32) 600

71,000

Consolidation Workpaper--20X2

(41)

Consolidated Net Income--20X2

PT Induk’s separate operating income Rp160,000,000 PT Induk’s share of PT Anak’

income:

PT Anak’s net income Rp75,000,000 Realized intercompany profit

on upstream inventory sale 3,000,000 PT Anak’ realized income Rp78,000,000

(42)