Ch5

Intercompany Inventory Transactions p168 Revenue on sales between affiliates cannot be recognized until merchandise is sold outside of the consolidated entity. The sale of inventory by one company to an affiliate produces reciprocal sales and purchases (cost of goods sold) accounts when the purchaser has a periodic inventory system (perpetual inventory system) We eliminate reciprocal sales and cost of goods sold (or purchases) amounts in preparing a consolidated income statement

Elimination of Intercompany Purchases and Sales P168 The workpaper elimination under a perpetual inventory system (used throughout this book) is a debit to sales and a credit to cost of goods sold. The reason is that a perpetual inventory system includes intercompany purchases in a separate cost of goods sold account of the purchasing affiliate when it is sold to outside third parties.

Elimination of Intercompany Purchases and Sales p168/169 P formed a subsidiary, S, in 2011 to retail a special line of P’s merchandise. All S’s purchases are made from P at 20 percent above P’s cost. During 2011, P sold merchandise that cost $40,000 to S for $48,000, and S sold all the merchandise to its customers for $60,000.

Separate books

Workpaper p169 In addition to eliminating intercompany profit items, it is necessary to eliminate intercompany receivables and payables in consolidation

Elimination of Unrealized Profit in Ending Inventory p169 The ending inventory of the purchasing affiliate reflects any unrealized profit or loss on intercompany sales because that inventory reflects the intercompany transfer price rather than cost to the consolidated entity

Elimination of Unrealized Profit in Ending Inventory p169 During 2012 P sold merchandise that cost $60,000 to Sep for $72,000 S sold all but $12,000 of this merchandise to its customers for $75,000

Separate Books p169/p170

p170 $50,000 (or 5/6) of this merchandise was then sold to outside entities for $75,000. $10,000 (or 1/6) remains in inventory at year-end. The consolidated entity realizes a gross profit of $25,000

Workpaper p170

另一種想法 Sales 60,000 COGS 60,000 賣給S, S又賣出 Sales 12,000 COGS 10,000 Inventory 2,000 將P公司賣給S,S沒賣出的部分 當做P沒賣出, 因此存貨也還原到原始價格

Equity Method p171 On 12/31, 2012, P defers $2,000 intercompany profit. P’s one-line consolidation entry reduces income from Sep by the $2,000 unrealized profit in the ending inventory and accordingly reduces the Investment in S account by $2,000.

Elimination of Unrealized Profit in Beginning Inventory p171 During 2013, P sold merchandise that cost $80,000 to S for $96,000, S sold 75 % of the merchandise for $90,000. S also sold the items in the beginning inventory with a transfer price of $12,000 to its customers for $15,000.

Separate books p171

p172 $60,000 of this merchandise, plus $10,000 beginning inventory, was sold for $105,000. $20,000 remained in inventory at year-end 2013. The consolidated entity realized a gross profit of $35,000.

Workpaper p172

說明 b Investment in S <= 與 S 期初可以對沖 COGS <= S 賣出去的商品高估 扣回來

Downstream and Upstream Sales p172/p173 A downstream sale is a sale by a parent to a subsidiary An upstream sale is a sale by a subsidiary to its parent. Consolidated statements eliminate reciprocal sales and cost of goods sold amounts regardless of whether the sales are upstream or downstream.

Downstream and Upstream Sales p173 We also eliminate any unrealized gross profit in ending inventory in its entirety for both downstream and upstream sales. However, the effect of unrealized profits in ending inventory on separate parent statements (as investor) and on consolidated financial statements (which show income to the controlling and noncontrolling stockholders) is determined by both the direction of the intercompany sales activity and the percentage ownership of the subsidiary, except for 100 percent-owned subsidiaries that have no noncontrolling ownership.

Downstream and Upstream Sales p173 In the case of downstream sales, the parent’s separate income includes the full amount of any unrealized profit (included in its sales and cost of sales accounts), and the subsidiary’s income is unaffected. When sales are upstream, the subsidiary’s net income includes the full amount of any unrealized profit (included in its sales and cost of sales accounts), and the parent’s separate income is unaffected

Downstream and Upstream Sales p173 The noncontrolling interest share may be affected if the subsidiary’s net income includes unrealized profit (the upstream situation). It is not affected if the parent’s separate income includes unrealized profit (the downstream situation) because the noncontrolling shareholders have an interest only in the income of the subsidiary.

Downstream and Upstream Sales p173 Unrealized profits and losses from upstream sales are allocated proportionately between consolidated net income (controlling interests) and noncontrolling interest share (noncontrolling interests) throughout this book .

Downstream and Upstream Effects on Income Computations p173 Assume that the separate incomes of a parent and its 80%-owned subsidiary for 2011 are as follows

Noncontrolling interest share computation p176 Intercompany sales during the year are $100,000, and the 12/ 31, 2011, inventory includes $20,000 unrealized profit. Downstream $50,000 net income of subsidiary * 20% = $10,000 Upstream ($50,000 net income of subsidiary - $20,000 unrealized) * 20% = $6,000

Consolidated net income computation p174

Unrealized Profits from Downstream Sales p175 P owns 90% S. Separate income statements of P and S for 2011, before consideration of unrealized profits

Unrealized Profits from Downstream Sales p175 P’s sales include $15,000 to S at a profit of $6,250, and S’s 12/31, 2011, Inventory includes 40% of the merchandise from the intercompany transaction. P’s operating income reflects the $2,500 unrealized profit in S’s inventory ($6,000 transfer price less $3,500 cost).

Equity method-順流本期未賣出

Workpaper-順流本期未賣出

Recognition of Intercompany Profit upon Sale to Outside Entities P176 the merchandise acquired from P during 2011 is sold by S during 2012, and there are no intercompany transactions between P and S during 2012. Separate income statements for 2012 before consideration of the $2,500 unrealized profit in S’s beginning inventory

Equity Method-順流本期已賣出

Workpaper-順流本期已賣出

Unrealized Profits from Upstream Sales p178 S sells merchandise that it purchased for $7,500 to P for $20,000 during 2011 and that P sold 60 % of the merchandise to outsiders during the year for $15,000. At year-end the unrealized inventory profit is $5,000 (cost $3,000, but included in P’s inventory at $8,000)

Equity Method-逆流年底未實現

Workpaper-逆流年底未實現

Equity method-逆流本期已賣出

Workpaper-逆流本期已賣出

Note Income from S = 48.75, 為調整完逆流本期已賣出的正確投資收益,分錄b將投資餘額還原到期初(為正確的期初餘額,已扣除去年底未實現損益),因此將此數字與子公司權益對沖時,並不平衡;將期初的正確投資餘額加上分錄 a 的 3.75 未實現損益之後,剛好能子公司權益對沖; 期初對沖時,產生非控制權益期初餘額(但此餘額未調整去年底未實現損益),此餘額扣除分錄a的1.25之後可得到正確的期初非控制權益餘額

Consolidation example-Intercompany Profits From Downstream Sales p180 S is a 90%-owned subsidiary of P, acquired for $94,500 cash on 7/1, 2011, when S’s net assets consisted of $100,000 capital stock and $5,000 retained earnings. (The cost of P’s 90% interest in S was equal to book value and fair value of the interest acquired ($105,000 × 90%), and accordingly, no allocation to identifiable and unidentifiable assets was necessary)

Equity Method-順流 p181

Workpaper-順流

Workpaper-順流

Workpaper-順流

Consolidation example-Intercompany Profits From Upstream Sales p183 S is an 80%-owned subsidiary of P, acquired for $480,000 on 1/2, 2011, when S’s stockholders’ equity consisted of $500,000 capital stock and $100,000 retained earnings.

Equity Method-逆流 p183

Working paper entries-逆流 p185

Working paper entries-逆流 p185

Noncontrolling Interest-逆流 p185

Workpaper-逆流