Transcript Intercompany Profit Transactions – Inventories

Intercompany Profit
Transactions – Inventories
©2009 Accounting Department, University Of Siliwangi
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Intercompany Inventory Transactions
Revenue on sales between affiliated companies
cannot be recognized until merchandise is sold
outside of the consolidated entity.
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Intercompany Inventory Transactions
Periodic
inventory
system
Perpetual
inventory
system
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Sales
Purchases
Sales
Cost of goods sold
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Elimination of Intercompany
Purchases and Sales
Pint formed a subsidiary, Shep Corporation.
All Shep’s purchases are made from
Pint at 20% above Pint’s cost.
Pint sold $20,000 of merchandise
to Shep for $24,000.
Shep sold all the merchandise
to its customers for $30,000.
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Elimination of Intercompany
Purchases and Sales
Inventory
20,000
Accounts Payable
20,000
To record purchases on account from other entities
Accounts Receivable
24,000
Sales
24,000
To record intercompany sales to Shep
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Elimination of Intercompany
Purchases and Sales
Cost of Sales
20,000
Inventory
To record cost of sales to Shep
Investment
6,000
Income from Shep
To record related equity interest
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20,000
6,000
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Elimination of Intercompany
Purchases and Sales
Inventory
24,000
Accounts Payable
24,000
To record intercompany purchases from Pint
Accounts Receivable
30,000
Sales
30,000
To record sales to outside customers
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Elimination of Intercompany
Purchases and Sales
Cost of Sales
24,000
Inventory
24,000
To record cost of sales to customers
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Elimination of Intercompany
Purchases and Sales
Pint
Sales
Cost of sales
Gross profit
100%
Shep
Adjustments and
Eliminations
$24,000 $30,000 a 24,000
20,000
Consolidated
$30,000
24,000
a 24,000 20,000
$ 4,000 $ 6,000
$10,000
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Elimination of Unrealized
Profit in Ending Inventory
During 2004, Pint sold merchandise that
cost $30,000 to Shep for $36,000.
Shep sold all but $6,000 of this
merchandise to its customers for $37,500.
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Elimination of Unrealized
Profit 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
Shep’s inventory
Cost to Pint
Unrealized profit in EI
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$6,000
–5,000
$1,000
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Elimination of Unrealized
Profit in Ending Inventory
Pint
Sales
Cost of sales
Gross profit
Inventory
Shep
Adjustments and
Eliminations
$36,000 $37,500 a 36,000
30,000
Consolidated
$37,500
30,000 b 1,000 a 36,000 25,000
$ 6,000 $ 7,500
$12,500
$ 6,000
b 1,000 $ 5,000
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Recognition of Unrealized
Profit in Beginning Inventory
During 2005 Pint sold merchandise
that cost $40,000 to Shep for $48,000.
Shep sold 75% of this merchandise
to its customers for $45,000.
Shep also sold its beginning inventory
with a transfer price of $6,000 for $7,500.
©2009 Accounting Department, University Of Siliwangi
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Recognition of Unrealized
Profit in Beginning Inventory
25% × 48,000 = $12,000 Ending inventory
$12,000 ÷ 1.2 = $10,000 EI transfer price
Shep’s inventory
Cost to Pint
Unrealized profit in EI
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$12,000
(10,000)
$ 2,000
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Recognition of Unrealized
Profit 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
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Recognition of Unrealized
Profit in Beginning Inventory
Pint
Sales
Cost of sales
Gross profit
Inventory
Investment
in Shep
Shep
Adjustments and
Eliminations
$48,000 $52,500 a 48,000
Consolidated
$52,500
40,000
42,000 c 2,000 a 48,000
b 1,000 35,000
$ 8,000 $10,500
$17,500
$12,000
XXX
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c 2,000 $10,000
b 1,000
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Downstream and Upstream Sales
Sales from top
to bottom are
downstream.
Parent
to
Subsidiary
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Sales from
bottom to top
are upstream.
Subsidiary
to
Parent
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Downstream and Upstream Sales
In downstream sales, the parent company’s
separate income includes the full amount of
any unrealized profit, and the subsidiary’s
income is not affected.
In upstream sales, the subsidiary company’s
net income includes the full amount of any
unrealized profit, and the parent company’s
separate income is not affected.
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Downstream and Upstream Effects
on Income Computations
Parent
Sales
Cost of sales
Gross profit
Expenses
Parent’s separate income
Subsidiary’s net income
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$600
300
$300
100
$200
80%-owned
Subsidiary
$300
180
$120
70
$ 50
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Downstream and Upstream Effects
on Income Computations
Intercompany sales during the year are $100,000.
The December 31 inventory includes
$20,000 unrealized profit.
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Downstream and Upstream Effects
on Income Computations
The parent company’s
sales and cost of sales
accounts reflect the
$20,000 unrealized profit.
©2009 Accounting Department, University Of Siliwangi
The $50,000
subsidiary net
income equals its
realized income.
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Downstream and Upstream Effects
on Income Computations
The subsidiary’s sales and
cost of sales accounts reflect
the $20,000 unrealized profit.
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The subsidiary’s
realized income
is $30,000.
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Downstream and Upstream Effects
on Income Computations
Consolidated Income (000)
Downstream Upstream
Sales ($900 – $100)
Cost of sales ($480 + $20 – $100)
Gross profit
Expenses ($100 + $70)
Total realized income
Less: Minority interest
Consolidated net income
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$800
400
$400
170
$230
10
$220
$800
400
$400
170
$230
6
$224
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Downstream and Upstream Effects
on Income Computations
Consolidated Income (000)
Downstream Upstream
Parent’s separate income
$200
Add: Income from subsidiary:
Equity in subsidiary’s income
less unrealized profit
[($50,000 × 80%) – $20,000]
20
Equity in subsidiary’s income
[($50,000 – $20,000) × 80%]
Parent and consolidated net income $220
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$200
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$224
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Deferral of Intercompany Profit
in Period of Sale: Downstream
Porter
Sales
Cost of sales
Gross profit
Expenses
Operating income
Income from Sorter
Net income
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$100
60
$ 40
15
$ 25
9
$ 34
90%-owned
Sorter
$50
35
$15
5
$10
–
$10
25
Deferral of Intercompany Profit
in Period of Sale: Downstream
Porter’s sales include $15,000 to Sorter
at a profit of $6,250.
Sorter’s December 31, 2003, inventory includes
40% of the merchandise from this transaction.
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Deferral of Intercompany Profit
in 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
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Deferral of Intercompany Profit
in Period of Sale: Downstream
Investment in Sorter
9,000
Income from Sorter
9,000
To record share of Sorter’s income
Income from Sorter
2,500
Investment in Sorter
2,500
To eliminate unrealized profit on sales to Sorter
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Partial Working Papers
December 31, 2003
Adjustments/ ConsolPorter Shorter Eliminations idated
Income Statement
Sales
$100
Income from Sorter
6.5
Cost of goods sold
(60)
Expenses
(15)
Minority interest expense
($10,000 × 10%)
Net income
$ 31.5
Balance Sheet
Inventory
Investment in Sorter
XXX
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Dr.
Cr.
$50 a 15
$135
c 6.5
(35) b 2.5 a 15 (82.5)
(5)
(20)
$10
$ 7.5
(1)
$ 31.5
b 2.5 $
c 6.5
5
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Recognition of Intercompany Profit
upon Sale to Outside Entities
Now assume that the merchandise acquired from
Porter during 2003 is sold by Sorter during 2004.
There are no intercompany transactions
between Porter and Sorter during 2004.
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Recognition of Intercompany Profit
upon Sale to Outside Entities
Porter
Sales
Cost of sales
Gross profit
Expenses
Operating income
Income from Sorter
Net income
$120
80
$ 40
20
$ 20
13.5
$ 33.5
90%-owned
Sorter
$60
40
$20
5
$15
–
$15
This is before considering $2,500 unrealized profit in BI.
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Recognition of Intercompany Profit
upon Sale to Outside Entities
Investment in Sorter
13,500
Income from Sorter
13,500
To record investment income from Sorter
Investment in Sorter
2,500
Income from Sorter
2,500
To record realization of profit from
intercompany sales to Sorter
©2009 Accounting Department, University Of Siliwangi
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Partial Working Papers
December 31, 2003
Adjustments/ ConsolPorter Shorter Eliminations idated
Income Statement
Dr. Cr.
Sales
$120 $60
$180
Income from Sorter
16
b 16
Cost of goods sold
(80) (40)
a 2.5 (117.5)
Expenses
(20)
(5)
(25)
Minority interest expense
($15,000 × 10%)
(1.5)
Net income
$ 36 $15
$ 36
Balance Sheet
Investment in Sorter
XXX
a 2.5 b 16
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Consolidation Example – Intercompany
Profits: Downstream Sales
Seay 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 acquisition
consisted of $100,000 capital stock
and $5,000 retained earnings.
The cost of Peak’s 90% interest was equal to book
value and fair value of the interest acquired.
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Consolidation Example – Intercompany
Profits: Downstream Sales
Cost:
$105,000 × 90% = $94,500
Minority interest: $105,000 × 10% = $10,500
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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
Unrealized profit in S’s inventory at 12/31/2006
Unrealized profit in S’s inventory at 12/31/2007
Seay’s accounts payable to Peak 12/31/2007
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$20,000
2,000
2,500
10,000
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Consolidation Example – Intercompany
Profits: Downstream Sales
At 12/31/2006 Peak’s investment in Seay
account had a balance of $128,500.
This balance consisted of Peak’s 90%
equity in Seay’s $145,000 net assets on
that date less $2,000 unrealized profit
in Seay’s 12/31/2006 inventory.
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Consolidation Example – Intercompany
Profits: Downstream Sales
$145,000 × 90% = $130,500
$130,500 – $2,000 = $128,500
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Consolidation Example – Intercompany
Profits: Downstream Sales
Seay’s equity:
Common stock
Retained earnings
Net assets
$100,000
45,000
$145,000
$45,000 – $5,000 = $40,000 increase in RE
$40,000 – $4,000 (minority interest) = $36,000
©2009 Accounting Department, University Of Siliwangi
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Consolidation Example – Intercompany
Profits: Downstream Sales
During 2007, Peak made the following entries
on its books for the investment in Seay:
Cash
9,000
Investment in Seay
9,000
To record dividends from Seay ($10,000 × 90%)
Investment in Seay
26,500
Income from Seay
26,500
To record income from Seay for 2007
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Consolidation Example – Intercompany
Profits: Downstream Sales
Equity in Seay’s net income: ($30,000 × 90%) $27,000
Add: Inventory profits recognized in 2007
2,000
Deduct: Inventory profits deferred at year end – 2,500
Total
$26,500
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Consolidation Example – Intercompany
Profits: Downstream Sales
12/31/2006
12/31/2007
Peak’s Investment
94,500
36,000 2,000
128,500
2,000
27,000 2,500
9,000
146,000
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Dividends
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Consolidation Example – Intercompany
Profits: Downstream Sales
Minority Interest
10,500
4,000
14,500
3,000
Dividends
1,000
16,500
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12/31/2006
12/31/2007
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Consolidation Example – Intercompany
Profits: Upstream Sales
Smith Corporation is an 80%-owned subsidiary
of Poch Corporation, acquired for $480,000
cash 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 to
book value and fair value of the interest acquired.
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Consolidation Example – Intercompany
Profits: Upstream Sales
Smith sells inventory items to Poch on a regular basis.
Sales to P in 2004
Unrealized profit in P’s inventory at 12/31/2003
Unrealized profit in P’s inventory at 12/31/2004
Intercompany A/R and A/P at 12/31/2004
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$300,000
40,000
30,000
50,000
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Consolidation Example – Intercompany
Profits: Upstream Sales
At December 31, 2003, Poch’s investment in
Smith had an account balance of $568,000.
This balance consisted of $600,000 underlying
equity in Smith’s net assets ($750,000 × 80%)
less $32,000 unrealized profit in Poch’s
December 31, 2003, inventory.
©2009 Accounting Department, University Of Siliwangi
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Consolidation Example – Intercompany
Profits: Upstream Sales
During 2004, Poch made the following entries
on its books for the investment in Smith.
Cash
40,000
Investment in Smith
40,000
To record dividends from Smith ($50,000 × 80%)
Investment in Smith
88,000
Income from Smith
88,000
To record income from Smith for 2004
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Consolidation Example – Intercompany
Profits: Upstream Sales
Equity in Smith’s net income ($100,000 × 80%)
Add: 80% of $40,000 unrealized profit
deferred in 2003
Less: 80% of $30,000 unrealized profit
at December 31, 2004
Total
©2009 Accounting Department, University Of Siliwangi
$80,000
32,000
–24,000
$88,000
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Consolidation Example – Intercompany
Profits: Upstream Sales
12/31/2003
12/31/2004
Poch’s Investment
480,000
Income 32,000
568,000 40,000
32,000 24,000
80,000
616,000
©2009 Accounting Department, University Of Siliwangi
Dividends
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