Irwin/McGraw-Hill © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 7-1 Intercompany Inventory Transactions 7 Electronic Presentation by Douglas

Irwin/McGraw-Hill ©2001 by The McGraw-Hill Companies, Inc. All rights reserved.

7-7-11

Intercompany Inventory Transactions 7

Electronic Presentation by Douglas Cloud

Pepperdine University

Baker / Lembke / KingBaker / Lembke / King


7-7-22

Transactions of Affiliated CompaniesTransactions 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 charged to cost of goods sold in the period the inventory is resold to nonaffiliates.


7-7-33Transactions of Affiliated CompaniesTransactions of Affiliated Companies

Parent Company

Parent Company

Subsidiary A

Subsidiary A

Subsidiary B

Subsidiary B

Consolidated EntityConsolidated Entity


7-7-44Aspects of Workpaper EliminationAspects 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 financial statements.


7-7-55

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 EliminationAspects of Workpaper Elimination


7-7-66

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 parent, consolidated net income and the overall claim of parent company shareholders must be reduced by the full amount of the unrealized profits.


7-7-77

PT IndukPT Induk


March 1, 20X1

Purchased inventory for Rp7,000,000

Downstream Sale -- Perpetual InventoryDownstream Sale -- Perpetual Inventory

PT AnakPT Anak

PT IndukPT IndukPT IndukPT Induk

Mar. 1 Inventory 7,000,000Cash 7,000,000

Purchase of inventory.

Mar. 1 Inventory 7,000,000Cash 7,000,000

Purchase of inventory.

Same PeriodSame Period


7-7-88

PT IndukPT Induk PT AnakPT Anak


April 1, 20X1

Intercorporate transfer of inventory

Rp10,000,000



Apr. 1 Cash 10,000,000Sales 10,000,000

Sale of inventory to PT Anak.

Apr. 1 Cash 10,000,000Sales 10,000,000

Sale of inventory to PT Anak.


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

Cost of inventory sold to PT Anak.

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

Cost of inventory sold to PT Anak.

PT AnakPT AnakPT AnakPT Anak

Apr. 1 Inventory 10,000,000Cash 10,000,000

Purchase of inventory from PT Induk.

Apr. 1 Inventory 10,000,000Cash 10,000,000

Purchase of inventory from PT Induk.



7-7-99

PT IndukPT Induk PT AnakPT Anak



Nov. 5, 20X1

Sell inventory for Rp15,000,000


Nov. 5 Cash 15,000,000Sales 15,000,000

Sale of inventory to Nonaffiliated.

Nov. 5 Cash 15,000,000Sales 15,000,000

Sale of inventory to Nonaffiliated.


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

Cost of inventory sold to Nonaffiliated.

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

Cost of inventory sold to Nonaffiliated.



7-7-1010Downstream Sale -- Perpetual InventoryDownstream 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

20X120X1


7-7-1111Downstream Sale -- Perpetual InventoryDownstream 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 10,000,000Eliminate intercompany inventory sale.


7-7-1212Resale in Period Following TransferResale in Period Following Transfer

PT IndukPT Induk


March 1, 20X1


PT AnakPT AnakApril 1,

20X1

Inter-corporate transfer of inventory

Rp10,000,000

January 2, 20X2

Sell inventory

for Rp15,000,000


7-7-1313Basic Equity-Method Entries--20X1Basic Equity-Method Entries--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 40,000,000Income from Subsidiary 40,000,000

Record equity-method income.

(8) Cash 24,000,000Investment in PT Anak Stock 24,000,000

Record dividends from PT Anak.Rp30,000,000 Rp30,000,000

x .80x .80

Rp50,000,000 Rp50,000,000 x .80x .80


7-7-1414

Income from Subsidiary 40,000

Dividends Declared (60,000) (30,000)

Investment in PT Anak 256,000

Consolidation Workpaper--20X1Consolidation Workpaper--20X1 (in ‘000) (in ‘000)


Dividends Declared (60,000) (30,000)


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 Item Debits Credits Consolidated


7-7-1515

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 Non- controlling Interest

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

Noncontrolling Interest





(11) 10,000 (10,000)

(11) 6,000 (60,000)

(11) 4,000



7-7-1616

Retained Earnings, January 1 300,000 100,000


Common Stock-- PT Anak 500,000 200,000Noncontrolling 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.

,(12)100,000 300,000

(12) 240,000

(12)200,000 500,000

(12) 60,000 64,000




7-7-1717Downstream Sale -- Inventory Not ResoldDownstream 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

20X120X1


7-7-1818

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




7-7-1919Consolidated Net Income--20X1Consolidated Net Income--20X1

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

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

PT Anak’s net income Rp50,000,000PT Induk’s proportionate share x .80 40,000,000

Consolidated net income, 20X1 Rp177,000,000


7-7-2020Basic Equity-Method Entries--20X2Basic Equity-Method Entries--20X2



(15) Investment in PT Anak Stock 60,000,000Income from Subsidiary 60,000,000

Record equity-method income.



x .80x .80

Rp75,000,000 Rp75,000,000 x .80x .80


7-7-2121


Dividends Declared (60,000 (40,000)


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


)



7-7-2222

Income to Noncontrolling Interest



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--20X2Consolidation Workspaper--20X2 (in ‘000) (in ‘000)

(17)15,000 (15,000)

(17) 8,000 (60,000)

(17) 7,000



7-7-2323

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

Induk’s beginning investment balance.





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




7-7-2424Downstream Sale -- Inventory Not ResoldDownstream 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

20X220X2


7-7-2525

An entry is required to eliminate beginning inventory profit.

An entry is required to eliminate beginning inventory profit.


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


(19) 3,000 337,000

(19) 3,000 417,000




PT Induk’s separate incomeRp160,000,000

Realization of deferred intercompany profit 3,000,000

PT Induk’s separate realized incomeRp163,000,000

PT Induk’s share of PT Anak’s income:PT Anak’ net income Rp75,000,000PT Induk’s proportionate share x .80 60,000,000

Consolidated net income, 20X2Rp223,000,000


7-7-2727

If Inventory Held > 2 periods

Retained Earnings xxx

Inventory xxx

For Previous PT Induk Case:

Retained Earnings 3,000,000

Inventory 3,000,000


7-7-2828

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 unrealized intercompany profit to both the controlling and noncontrolling interests.


7-7-2929Upstream Sale--Perpetual InventoryUpstream Sale--Perpetual Inventory

PT IndukPT Induk


March 1, 20X1


PT AnakPT AnakApril 1,

20X1

Inter-corporate transfer of inventory

Rp10,000,000

Jan. 2 20X2

Sell inventory for

Rp15,000,000


7-7-3030Basic Equity--Method Entries--20X1Basic 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 24,000,000Investment in PT Anak

Foods Stock 24,000,000 Record dividends from PT Anak.

Rp50,000,000 Rp50,000,000 x .80x .80

Rp50,000,000 Rp50,000,000 x .80x .80


7-7-3131Consolidation Workpaper--20X1Consolidation Workpaper--20X1 (in ‘000) (in ‘000)








(23) 40,000

(23) 24,000

(23) 16,000

)



7-7-3232








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






-

(24) 9,400 (9,400)

(24) 6,000 (60,000)

(24) 3,400



7-7-3333



Common Stock 500,000 200,000Noncontrolling 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.


(25)100,000 300,000

(25) 240,000(25)200,000 500,000

(25) 60,000 63,400



7-7-3434

An entry is required to eliminate the intercompany upstream sale of inventory.

An entry is required to eliminate the intercompany upstream sale of inventory.


Sales 400,000 200,000


Inventory 100,000 75,000

(26)10,000 590,000

(26) 7,000 278,000

(26) 3,000 172,000




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

PT Anak’s net income Rp50,000,000 Less: Unrealized intercompany profit on upstream inven-

tory sale -3,000,000PT Anak’ realized income Rp47,000,000 PT Induk’s proportionate share x .80 37,600,000



7-7-3636Basic Equity--Method Entries--20X2Basic Equity--Method Entries--20X2

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

Income from Subsidiary 60,000,000 Record equity-method income.



x .80x .80

Rp75,000,000 Rp75,000,000 x .80x .80


7-7-3737Consolidation Workpaper--20X2Consolidation Workpaper--20X2 (in ‘000) (in ‘000)








(29) 60,000

(29) 32,000

(29) 28,000

)



7-7-3838

Income to Noncontrolling Interest







(30)15,600 (15,600)

(30) 8,000 (60,000)

(30) 7,600




7-7-3939







Common Stock 500,000 200,000


(31)120,000 420,000

(31)256,000(31)200,000 500,000

(31) 64,000




7-7-4040


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.


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


(31) 64,000

(32) 3,000 337,000

(32) 2,400 417,600

(32) 60071,000




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

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

on upstream inventory sale 3,000,000PT Anak’ realized income Rp78,000,000 PT Induk’s proportionate share x .80 62,400,000



7-7-4242Chapter SevenChapter Seven

The The EndEnd

Documents

Irwin/McGraw-Hill © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 7-1 Intercompany Inventory Transactions 7 Electronic Presentation by Douglas