Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun
: 2010
Intercompany Profit Transaction - Inventories
Pertemuan 5-6
Intercompany Profit Transactions – Inventories
1: Intercompany Inventory Profits
Intercompany Transactions
• For consolidated financial statements, ARB No. 51 (as
amended by FASB Statement No. 160) states:
– "intercompany balances and transactions shall be
eliminated."
• Show income and financial position as if the intercompany
transactions had never taken place.
Intercompany Sales of Inventory
• Profits on intercompany sales of inventory
– All 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
• Consider a FIFO inventory system
– Beginning inventories are sold
– Ending inventories are from current period
No Intercompany Profits in Inventories
• During 2009, Pretty sold goods costing $1,000 to its subsidiary,
Simple, at a gross profit of 30%. Simple had none of this inventory
on hand at the end of 2009. Worksheet entry for 2009:
Sales
Cost of sales
1,429
1,429
Sales = $1,000 / (1-30%) = $1,429
• All intercompany sales of inventories have been resold to outside
parties, so remove the full sales price from both sales and cost of
sales.
– Pretty's sales are reduced $1,429.
– Simple's cost of sales are reduced $1,429.
• The same entry is used if Simple sells to Pretty.
Intercompany Profits Only in Ending
Inventories
• Last year, 2009, Paul sold goods costing $500 to its
subsidiary, Sal, at a gross profit of 25%. Sal had none of
this inventory on hand at the end of 2009.
• During 2010, Paul sold additional goods costing $900 to Sal
at a gross profit of 40%. Sal has $200 of these goods on
hand at 12/31/2010. Worksheet entries for 2010:
Sales
1,500
1,500
Cost of sales
Sales = $900 / (1-40%) = $1,500
Cost of sales
Inventory
Ending inventory profit = $200 x 40%
80
80
Intercompany Profits Beginning and Ending
Inventories
Last year, 2009, Pam sold goods costing $300 to its subsidiary, Sir, at markup of 25%. Sir had $120 of this inventory on hand at the end of 2009.
During 2010, Pam sold additional goods costing $500 to Sir at a 30% markup. Sir has $260 of these goods on hand at 12/31/2010. Worksheet entries
for 2010:
Sales
650
650
Cost of sales
Sales = $500 + 30%($500) = $650
Cost of sales
60
60
Inventory
Ending inv. profits = $260 x 30%/130%
Investment in Subsidiary
Cost of sales
Begin. inv. profits = $120 x 25%/125% = $24
24
24
Intercompany Profit Transactions – Inventories
2: Upstream & Downstream Inventory Sales
Upstream and Downstream Sales
Downstream
Sales
Parent
Subsidiary sells
to parent
Parent sells to
subsidiary
Subsidiary 1
Subsidiary 2
Subsidiary 3
Upstream Sales
Intercompany Inventory Sales
• The worksheet entries for eliminating intercompany profits
for downstream sales
Sales
XXX
XXX
Cost of sales
For the intercompany sales price
Cost of sales
XX
XX
Inventory
For the profits in ending inventory
Investment in Subsidiary
Cost of sales
For the profits in beginning inventory
XX
XX
For upstream sales, the last entry would also include a debit to noncontrolling interest, splitting the profit to be realized between
controlling and noncontrolling interests.
Data for 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 profits in ending inventory $60
– IC profit in beginning inventory $24
Income Sharing with Downstream Sales – PARENT Makes Sale
Subsidiary net income
Current amortizations
Adjusted income
$5,200
(450)
$4,750
Defer profits in EI
Recognize profits in BI
Income recognized
(60)
24
$4,714
CI 80% share
$3,800
(60)
24
$3,764
Income from subsidiary
$2,400
Subsidiary dividends
$3,000
NCI 20% share
$950
When parent makes the IC sale,
the impact of deferring and
recognizing profits falls all to
the parent.
$600
Income Sharing with Upstream Sales –
SUBSIDIARY Makes Sale
Subsidiary net
Current
Adjusted income
$5,20
(450)
$4,75
Defer profits in EI
Recognize profits
Income
(60)
24
$4,71
Subsidiary
$3,00
When subsidiary makes the IC sale,
the impact of deferring and
recognizing profits is split among
controlling and noncontrolling
interests.
CI 80% share
$3,800
(48)
19.2
$3,771.2
Income from subsidiary
$2,400
NCI 20% share
$950.0
(12.0)
4.8
$942.8
$600
Intercompany Profit Transactions – Inventories
3: Unrealized Profits in Ending Inventories
Ending Inventory on Hand
• Intercompany profits in ending inventory
– Eliminate at year end
• Working paper entry
Cost of sales
Inventories
For the unrealized profit
XXX
XXX
Parent Accounting
Porter owns 90% of Sorter acquired at book value (no amortizations).
During the current year, Sorter reported $10,000 income. Porter sold
goods to Sorter during the year for $15,000 including a profit of
$6,250. Sorter still holds 40% of these goods at the end of the year.
• Unrealized profit in ending inventory
40%(6,250) = $2,500
• Porter's Income from Sorter
90%(10,000) – 2,500 unreal. Profits = $6,500
• Noncontrolling interest share
10%(10,000) = $1,000
Entries
• Porter's journal entry to record income
Investment in Sorter
6,500
Income from Sorter
6,500
• Worksheet entries to eliminate intercompany sale and
unrealized profits
Sales
15,000
Cost of sales
Cost of sales
Inventory
15,000
2,500
2,500
Worksheet – Income Statement
Porter Sorter
Sales
Income from Sorter
$100.0
$50.0
6.5
Cost of sales
(60.0)
(35.0)
Expenses
(15.0)
(5.0)
Noncontrolling interest
Controlling interest share
DR
$7.5
Consol
15.0
$135.0
6.5
0.0
2.5 15.0
(82.5)
(20.0)
1.0
$31.5
CR
(1.0)
$31.5
There would be a credit adjustment to Inventory for 2.5 on the
balance sheet portion of the worksheet.
What if?
If the sales had been upstream, by Sorter to Porter:
• Unrealized profits in ending inventory
40%(6,250) = $2,500
• Porter's Income from Sorter
90%(10,000 – 2,500) = $6,750
• Noncontrolling interest share
10%(10,000 – 2,500) = $750
• Upstream profits impact both
– Controlling interest share
– Non-controlling interest share
Intercompany Profit Transactions – Inventories
4: Recognizing Profits from Beginning
Inventories
Intercompany Profits in Beginning
Inventory
Unrealized profits in
ending inventory one year
Become
Profits to be recognized in the beginning inventory of
the next year!
Intercompany Profit Transactions – Inventories
5: Impact on Non-controlling Interest
Direction of Sale and NCI
The impact of unrealized profits in ending inventory and
realizing profits in beginning inventory depends on the
direction
• Downstream sales
– Full impact on parent
• Upstream sales
– Share impact between parent and non-controlling
interest
Calculating Income and NCI
Downstream sales:
Income from sub
= CI%(Sub's NI) – Profits in EI + Profits in BI
Noncontrolling interest share
= NCI%(Sub's NI)
Upstream sales:
Income from sub
= CI%(Sub's NI – Profits in EI + Profits in BI)
Noncontrolling interest share
= NCI%(Sub's NI – Profits in EI + Profits in BI)
Upstream Example with Amortization
Perry acquired 70% of Salt on 1/1/2009 for $420 when Salt's equity consisted of
$200 capital stock and $200 retained earnings. Salt's inventory was understated by
$50 and building, with a 20 year life, was understated by $100. Any excess is
goodwill.
Separate
Dividends
2009
2010
Perry
Salt Perry
Salt
$1,25 $705 $1,50 $745
$600 $280 $600 $300
During 2009, Salt sold goods costing $700 to Perry at a 20% markup. $240 of these
goods were in Perry's ending inventory.
In 2010, Salt sold goods costing $900 to Perry at a 25% markup and Perry still had
$100 on hand at the end of the year.
Analysis and Amortization
Cost of 70% of Salt
$420
Implied value of Salt 420/.70
$600
Book value 200 + 200
Excess
Allocated to:
Inventory
Building
Goodwill
400
$200
Unamort
1/1/09
50
100
50
200
Amort
2009
(50)
(5)
0
(55)
Unamort
1/1/10
0
95
50
145
Amort
2010
0
(5)
0
(5)
Unamort
12/31/10
0
90
50
140
2009 Income Sharing (Upstream)
Salt's net income
Current amortizations
Adjusted income
$705
(55)
$650
Defer profits in EI
Income recognized
(40)
$610
Subsidiary dividends
$280
CI 70% share
$455
($28)
$427
Income from Salt
$196
NCI 30% share
$195
($12)
$183
$84
Perry's 2009 Equity Entries
Investment in Salt
420
Cash
420
For acquisition of 70% of Salt
Cash
196
Investment in Salt
196
For dividends received
Investment in Salt
Income from Salt
For share of income
427
427
2009 Worksheet Entries
1. Adjust for errors & omissions - none
2. Eliminate intercompany profits and losses
Sales
700
Cost of sales
Cost of Sales
700
40
Inventory
3.
40
Eliminate income & dividends from sub. and bring Investment
account to its beginning balance
Income from Salt
427
Dividends
196
Investment in Salt
231
2009 Entries (2 of 3)
4.
Record noncontrolling interest in sub's earnings & dividends
Noncontrolling interest share
183
84
99
Dividends
Noncontrolling interest
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock
Retained earnings
Inventory
Building
Goodwill
Investment in Salt
Noncontrolling interest
200
200
50
100
50
420
180
2009 Entries (3 of 3)
6. Amortize fair value/book value differentials
Cost of sales
50
Inventory
Depreciation expense
Building
7. Eliminate other reciprocal balances – none
50
5
5
2010 Income Sharing (Upstream)
Salt's net income
Current
$745
(5)
Adjusted income
$740
Defer profits in EI
Realize profits from
Income recognized
(20)
40
$760
Subsidiary
$300
CI 70% share
$518
($14)
$28
$532
Income from Salt
$210
NCI 30% share
$222
($6)
$12
$228
$90
Perry's 2010 Equity Entries
Cash
210
Investment in Salt
210
For dividends received
Investment in Salt
Income from Salt
For share of income
532
532
2010 Worksheet Entries
1.
2.
Adjust for errors & omissions - none
Eliminate intercompany profits and losses
Sales
900
900
Cost of sales
Cost of Sales
20
20
Inventory
Investment in Salt
Noncontrolling interest
28
12
40
Eliminate income & dividends from sub. and bring Investment account
to its beginning balance
Cost of sales
3.
Income from Salt
Dividends
Investment in Salt
532
210
322
2010 Entries (2 of 3)
4.
Record non-controlling interest in sub's earnings & dividends
Non-controlling interest share
228
90
138
Dividends
Noncontrolling interest
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock
Retained earnings
Inventory
Building
Goodwill
Investment in Salt
Non-controlling interest
200
625
0
95
50
679
291
2010 Entries (3 of 3)
6. Amortize fair value/book value differentials
Depreciation expense
Building
7. Eliminate other reciprocal balances – none
5
5