Intercompany inventory transfers.ppt

7/27/2019 Intercompany inventory transfers.ppt

1/31

Intercompany Inven

- 1

INTERCOMPANY INVENTORY

TRANSFERS

Parent Subsidiary

Accounting

Calculators


2/31

Intercompany Inven

- 2

Intercompany Inventory

Transactions Transactions between the

parent and subsidiary areviewed as internal

transactions of a singleeconomic entity.

The effects ofintercompany transactions

should be eliminatedfrom the consolidatedfinancial statements.

5-2


3/31

General Overview

Transfers at cost

The balance sheet inventory amounts at theend of the period require no adjustment forconsolidation because the purchasing affiliatesinventory carrying amount is the same as the

cost to the transferring affiliate and theconsolidated entity

When inventory is resold to a nonaffiliate, theamount recognized as cost of goods sold by the

affiliate making the outside sale is the cost tothe consolidated entity


4/31

General Overview

Transfers at cost

An eliminating entry is needed toremove both the revenue from the

intercorporate sale and the related costof goods sold recorded by the seller

Consolidated net income is not affected

by the eliminating entry


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Intercompany Inven

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ELIMINATING ENTRY Page ##Date Description Debit Credit

Sales $$$Cost of Goods Sold $$$

Purchases component of COGS.

On the consolidation worksheet, eliminateALLintercompany sales/purchases of

inventory in the year of the sale.

The elimination amount is the amountassigned as the sales price of the

transfer.

5-5


6/31

General Overview

Transfers at a profit or loss

Companies use different approaches insetting intercorporate transfer prices

The elimination process must removethe effects of such sales from theconsolidated statements


7/31

General Overview

Transfers at a profit or loss

The workpaper eliminations needed forconsolidation in the period of transfer

must adjust accounts in: Consolidated income statement: Sales and

cost of goods sold

Consolidated balance sheet: Inventory

The resulting financial statementsappear as if the intercompany transferhad not occurred


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Intercompany Inven

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ELIMINATING ENTRY Page ##

Date Description Debit Credit

Cost of Goods Sold $$$

Inventory $$$

Ending Inventory component of COGS.

Unrealized Inventory GainsYear of Transfer

Despite the previous entry, endinginventory is still overstated by the

amount of gain on the inventory that isstill unsold at year end.

We must eliminate the unrealized gain asfollows:

5-8


9/31

Downstream Sale of Inventory

For consolidation purposes, profits recordedon an intercorporate inventory sale arerecognized in the period in which the

inventory is resold to an unrelated party Until the point of resale, all intercorporate

profits must be deferred

When a company sells an inventory item to anaffiliate, one of three situations results:

1. The item is resold to a nonaffiliate during the sameperiod

2. The item is resold to a nonaffiliate during the nextperiod

3. The item is held for two or more periods by thepurchasing affiliate


10/31

Downstream Sale of Inventory -Illustration

Resale in period of intercorporatetransfer


11/31


Peerless records the following entries on its books:March 1, 20X1

Inventory 7,000

Cash 7,000

Purchase of inventory.

April 1, 20X1

Cash 10,000

Sales 10,000

Sale of inventory to Special Foods.

Cost of Goods Sold 7,000

Inventory 7,000

Cost of inventory sold to Special Foods.

Special Foods records the purchase of the inventory:

April 1, 20X1

Inventory 10,000

Cash 10,000

Purchase of inventory from Peerless.

Peerless Products acquires 80 percent of the common stock of Special

Foods on December 31, 20X0, for its book value of $240,000. The fairvalue of noncontrolling interest on that date is equal to its book value

of $60,000. On March 1, 20X1, Peerless buys inventory for $7,000

and resells it to Special Foods for $10,000 on April 1.


12/31


This entry does not affect consolidated net income

No elimination of intercompany profit is needed becauseall the intercompany profit has been realized throughresale of the inventory to the external party during the

current period

Special Foods records the sale:

November 5, 20X1

Cash 15,000

Sales 15,000

Sale of inventory to Nonaffiliated.


Inventory 10,000

Cost of inventory sold to Nonaffiliated.

Eliminating Entry:

Sales 10,000


Eliminate intercompany inventory sale.


13/31


Resale in period followingintercorporate transfer


14/31


Cash 24,000

Investment in Special Foods Stock 24,000

Record dividends from Special Foods:$30,000 x .80


Income from Subsidiary 40,000

Record equity-method income:

$50,000 x .80

Using the basic equity method, Peerless records its share of SpecialFoods income and dividends for 20X1 in the normal manner:

As a result of these entries, the ending balance of the investment

account is $256,000 ($240,000 + $40,000 - $24,000).

The consolidation workpaper prepared at the end of 20X1 appears in

Figure 71 of the text.


15/31


Eliminating Entries:

E(10) Income from Subsidiary 40,000Dividends Declared 24,000


Eliminate income from subsidiary.

E(11) Income to Noncontrolling Interest 10,000

Dividends Declared 6,000

Noncontrolling Interest 4,000

Assign income to noncontrolling interest.$10,000 = $50,000 x .20

E(12) Common StockSpecial Foods 200,000

Retained Earnings, January 1 100,000



Eliminate beginning investment balance.

E(13) Sales 10,000


Inventory 3,000

Eliminate intercompany downstream sale of inventory.

Only entry E(13) relates to the elimination of unrealized inventory profits


16/31


Consolidated Net Income20X1


17/31


Cash 32,000


Record dividends from Special Foods: $40,000 x .80



Record equity-method income: $75,000 x .80

During 20X2, Special Foods receives $15,000 when it sells toNonaffiliated Corporation the inventory that it had purchased for

$10,000 from Peerless in 20X1. Also, Peerless records its pro rata

portion of Special Foods net income and dividends for 20X2 with the

normal basic equity-method entries:

The consolidation workpaper prepared at the end of 20X2 is shown in

Figure 72 in the text. Four elimination entries are needed:


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19/31









Assign income to noncontrolling interest.$15,000 = $75,000 x .20






E(19) Retained Earnings, January 1 3,000


Eliminate beginning inventory profit.

Entry E(19) is needed to adjust cost of goods sold to the proper

consolidated balance and to reduce beginning retained earnings.


20/31




21/31


Inventory held two or more periods Prior to liquidation, an eliminating entry is

needed in the consolidation workpaper eachtime consolidated statements are prepared torestate the inventory to its cost to theconsolidated entity


Inventory 3,000

Eliminate beginning inventory profit.

For example, if Special Foods continues to hold the inventory purchased the

following eliminating entry is needed in the consolidation workpaper each

time a consolidated balance sheet is prepared for years following the year of

intercompany sale, for as long as the inventory is held:


22/31

Upstream Sale of Inventory

When an upstream sale of inventoryoccurs and the inventory is resold bythe parent to a nonaffiliate during

the same period, all the parentsequity-method entries and theeliminating entries in the

consolidation workpaper areidentical to those in the downstreamcase


23/31

Upstream Sale of Inventory

When the inventory is not resold to anonaffiliate before the end of theperiod, workpaper eliminating

entries are different from thedownstream case only by theapportionment of the unrealized

intercompany profit to both thecontrolling and noncontrollinginterests


24/31

Upstream Sale of Inventory -Illustration

Cash 24,000


Record dividends from Special Foods: $30,000 x .80



Record equity-method income: $50,000 x .80

20X1: Peerless records the following basic equity-method entries:


25/31









Assign income to noncontrolling interest:

$9,400 = ($50,000 - $3,000) x .20






E(26) SalesCost of Goods Sold 3,000 7,000

Inventory 3,000

Eliminate intercompany upstream sale of inventory.

All eliminating entries are the same in the upstream case as in the

downstream case except for entry E(24).

Refer Figure 7-3 in the text for the Consolidation Workpaper.


26/31


27/31


Basic Equity-Method Entries20X2

Cash 32,000


Record dividends from Special Foods:

$40,000 x .80

Investment in Special Foods Stock 60,000Income from Subsidiary 60,000

Record equity-method income:

$75,000 x .80

As in the downstream illustration, the investment account balance at

the end of 20X2 is $284,000.

The consolidation workpaper used to prepare consolidated financial

statements at the end of 20X2 appears in Figure 74 in the text.


28/31






(E30) Income to Noncontrolling Interest 15,600



Assign income to noncontrolling interest:

$15,600 = ($75,000 - $3,000) x .20







Noncontrolling Interest 600Cost of Goods Sold 3,000

Eliminate beginning inventory profit:

$2,400 = $3,000 x .80

$600 = $3,000 x .20

Workpaper entry E(32) deals explicitly with the elimination of the

inventory profit on the upstream sale.


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Intercompany Inven5 30


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p y

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Unrealized Inventory GainsEffect on Noncontrolling Interest

If the transfer is DOWNSTREAM, thenany resulting unrealized gain belongs tothe parent.

No effect on Noncontrolling Interest If the transfer is UPSTREAM, then any

resulting unrealized gain belongs to thesubsidiary.

Noncontrolling Interest must beadjusted for the unrealized gain.

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Intercompany Inven5-31


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p y

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Noncontrolling Interest in Sub Net Income = the

noncontrolling % of the subs net income, AFTER

eliminating UPSTREAM unrealized intercompany profit.

Subsidiary Net Income (Loss)

Less: Upstream, unrealized,

intercompany gain (losses)

= Subsidiary Net Income (Loss)Available to Noncontrolling Shareholders

Noncontrolling %

= Noncontrolling Interest in Subsidiary Net Income

Unrealized Inventory GainsEffect on Noncontrolling Interest

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Intercompany inventory transfers.ppt