Chapter 8 Consolidated Financial statements: Intercompany Transactions Objectives of the Chapter



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Intercompany Sales of Merchandise (Contd.) Example 8.3 : (Contd.)

  • Note:
  • Starr Company’s cost of goods sold and inventories are not affected by working paper eliminations. Both Starr’s cost of goods sold and inventories are stated at cost.

Intercompany Sales of Merchandise (Contd.)

  • b.Intercompany Sales with Unrealized Intercompany Profit in Ending Inventories
  • Without the working paper elimination, the consolidated ending inventory and cost of goods sold are both overstated.

Intercompany Sales of Merchandise (Contd.)

  • The ending inventory is overstated for the mark up of the unsold ending inventory (the unrealized gain).
  • The cost of goods sold is overstated for the mark up of the cost of goods sold (the realized gain).

Intercompany Sales of Merchandise (Contd.) Example 8.4:Intercompany sales at a mark up

  • During 2001, Sage company (the 95%-owned subsidiary) sold merchandize to Post at a gross profit margin of 20% on sales price.
  • Sales by Sage to Post totaled $120,000 in year 2001, of which $40,000 remained unsold by Post on 12/31/2001.

Intercompany Sales of Merchandise (Contd.) Example 8.4: (Contd.)

  • On 12/31/2001, Post still owed $30,000 to Sage for merchandise. Both companies use the perpetual inventory system.
  • The foregoing transactions are recorded in summary form by the two companies as follows:

Intercompany Sales of Merchandise (Contd.) Example 8.4 : (Contd.)

  • Post Company Journal Entries
  • Inventories
  • 120,000
  • 120,000
  • To record purchases from Sage.
  • Intercompany Accounts Payable
  • 90,000
  • Cash
  • 90,000
  • To record payments made to Sage Company.
  • 100,000
  • Sales
  • 100,000
  • To record sales.
  • 80,000
  • Inventories
  • 80,000
  • To record cost of goods sold.

Intercompany Sales of Merchandise (Contd.) Example 8.4 : (Contd.)

  • Sage Corporation Journal Entries
  • Intercompany Accounts
  • Receivable
  • 120,000
  • 120,000
  • To record sales to Post Corporation
  • Intercompany Cost of Goods Sold
  • 96,000
  • Inventories
  • 96,000
  • To record cost of goods sold to Post Corporation.
  • Cash
  • 90,000
  • Intercompany Accounts
  • Receivable
  • 90,000
  • To record payments received from Post Corporation.

Intercompany Sales of Merchandise (Contd.) Example 8.4 : (Contd.)

  • The intercompany gross profit in Sage’s sale to Post in year 2001 is analyzed as follows:
  • Selling Price
  • Cost
  • Gross Profit
  • (25% of Cost; 20%Of Selling Price)
  • Add: Sales
  • $120,000
  • $96,000
  • $24,000
  • Subtotals
  • $120,000
  • $96,000
  • $24,000
  • Less: Ending
  • inventories
  • 40,000
  • 32,000
  • 8,000
  • Cost of goods sold
  • $80,000
  • 64,000
  • $16,000

Intercompany Sales of Merchandise (Contd.) Example 8.4 : (Contd.)

  • The following working paper elimination is required for Sage’s intercompany’s sales of merchandise to Post for the year ended 12/31/2001:
  • 120,000
  • Intercompany Cost of
  • Goods Sold—Sage
  • 96,000
  • Cost of Goods Sold—Post
  • 16,000
  • 8,000
  • To eliminate intercompany sales, cost of goods sold, and unrealized intercompany profit in inventories. (Income tax effects are disregarded.)
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