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



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

  • Entering the preceding eliminations in the working paper for consolidated financial statements results in the consolidated amounts shown below (amounts for total sales to outsiders and cost of goods sold are assumed):

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

  • Post
  • Corp.
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Revenue:
  • Sales:
  • 5,800,000
  • 1,200,000
  • 7,000,000
  • Intercompany
  • sales
  • 120,000
  • (b)(120,000)
  • Costs and expenses:
  • 4,100,000
  • 760,000
  • (b) (16,000)
  • 4,844,000
  • 96,000
  • (b) (96,000)

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

  • Contd.
  • Post
  • Corp.
  • Sage Company
  • Eliminations Inc.(Dec.)
  • Consolidated
  • Balance Sheet
  • Assets
  • Intercompany
  • rec.(pay.)
  • (30,000)
  • 30,000
  • Inventories
  • 900,000
  • 475,000
  • (b) (8,000)
  • 1,367,000

Notes to the Intercompany Sales of Merchandise at a Mark Up by a Partially Own Subsidiary

  • 1.The $8,000 unrealized intercompany profit is attributable to Sage (the seller, a partially-owned subsidiary).
  • This unrealized intercompany profit should be taken into account in the computation of the minority interest in Sage’s net income for year 2001 (would be illustrated in Example 8.9).

Notes to the Intercompany Sales of Merchandise at a Mark Up by a Partially Own Subsidiary (Contd.)

  • 2.Also, this $8,000 would be entered into the Sage’s portion of consolidated retained earnings on 12/31/2001.
  • 3.If the intercompany sales of merchandise are made by a parent company or by a wholly owned subsidiary, the unrealized intercompany profit will not have any effect on any minority interest in net income.
  • This is because the selling agent does not have minority stockholders.

Intercompany (Unrealized) Profit in Beginning and Ending Inventories

  • It is assumed that, on a FIFO basis, the intercompany profit in the purchaser’s beginning inventories is realized through sales of the merchandise to outsiders during the following accounting period.

Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • Only the intercompany profit in ending inventories remains unrealized at the end of the period.
  • Continuing with Example 8.4, assume that Sage’s intercompany sales of merchandise to Post Corporation during the year ended 12/31/2002, are analyzed as follows:

Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • Selling Price
  • Cost
  • Gross Profit
  • (25% of Cost; 20%Of Selling Price)
  • $40,000
  • $32,000
  • $8,000
  • Add: Sales
  • 150,000
  • 120,000
  • 30,000
  • Subtotals
  • $190,000
  • $152,000
  • $38,000
  • Less: Ending
  • inventories
  • 60,000
  • 48,000
  • 12,000
  • $130,000
  • $104,000
  • $26,000

Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • Sage’s intercompany sales ($120,000) and intercompany cost of goods sold ($96,000) for the year ended 12/31/2001 had been closed to Sage’s retained earnings at the end of 2001.
  • Thus, from a consolidated point of view Sage’s 12/31/2001 retained earnings was overstated by $7,600 (95% * $8,000).
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