Chapter 5
Intercompany Profit Transactions—Inventory
▪ Intercompany transaction: a transaction that occurs between two units of the same entity.
▪ Downstream transaction: an intercompany transaction flowing from the parent to the subsidiary.
▪ Upstream transaction: an intercompany transaction flowing from the subsidiary to the parent.
▪ Lateral transaction: an intercompany transaction flowing from one subsidiary to another subsidiary.
▪ Intercompany Sales of Inventory
Profits on intercompany sales of inventory
- Recognized if goods have been resold to outsiders - Deferred if the goods are still held in inventory
Previously deferred profits in beginning inventory are recognized in the period the goods are sold. Assuming FIFO
o Beginning inventories are sold
o Ending inventories are from current purchases
▪ The worksheet entries for eliminating intercompany profits for downstream sales
▪ For upstream sales, the last entry would include a debit to noncontrolling interest, sharing the realized profit between controlling and noncontrolling interests.
Example:
For the year ended 12/31/2011:
– Subsidiary income is $5,200 – Subsidiary dividends are $3,000
– Current amortization of acquisition price is
$450 Intercompany (IC) sales information:
– IC sales during 2011 were $650 – IC profit in ending inventory $60 – IC profit in beginning inventory $24
Income Sharing with Downstream Sales – PARENT Makes Sale
Income Sharing with Upstream Sales – SUBSIDIARY Makes Sale
Summary of Journal Entries for Downstream Sales (P S)
a. Sales xxx
Cost of goods sold xxx
To eliminate intercompany sales and related cost of goods sold amounts.
To adjust COGS and beginning investment balance for unrealized profits in the beginning inventory.
c. Cost of goods sold xxx
Inventory xxx
To eliminate unrealized profits in the ending inventory and to increase the consolidated COGS to the consolidated entity.
d. Income from S xxx
Dividends xxx
Investment in S xxx
To eliminate the investment income and x percent of the dividends of S and to reduce the investment account to its beginning-of-period balance, plus adj if any*
e. Noncontrolling interest share xxx
Dividends xxx
Noncontrolling interest xxx
To enter noncontrolling interest share of subsidiary income and dividends.
f. Capital stock—S xxx
Retained Earnings—Say xxx
Investment in S xxx
Noncontrolling interest xxx
To eliminate reciprocal investment and equity balances and record beginning noncontrolling interest.
g. Accounts payable xxx
Accounts receivable xxx
To eliminate reciprocal payables and receivables from intercompany sales.
b. Investment in xx
Cost of goods x xx
x
Summary of Journal Entries for Upstream Sales (SP)
a. Sales xxx
Cost of goods sold xxx
To eliminate reciprocal sales and cost of goods sold amounts.
b. Investment in S xxx
Noncontrolling interest xxx
Cost of goods sold xxx
To adjust COGS and beginning investment balance for unrealized profits in the beginning inventory.
c. Cost of goods sold xxx
Inventory xxx
To eliminate unrealized profits in the ending inventory and to increase COGS.
d. Income from S xxx
Dividends xxx
Investment in S xxx
To eliminate the investment income and x percent of the dividends of S and to reduce the investment account to its beginning-of-period balance.
e. Noncontrolling interest share xxx
Dividends xxx
Noncontrolling interest xxx
To enter noncontrolling interest share of subsidiary income and dividends.
f. Capital stock—S xxx Retained Earnings—Say xxx
Investment in S xxx
Noncontrolling interest xxx
To eliminate reciprocal investment and equity balances and record beginning noncontrolling interest.
g. Accounts payable xxx
Accounts receivable xxx
To eliminate reciprocal payables and receivables from intercompany sales
SEMANGATT RABESS AHAHHAHHA
