Ch.

5
Intercompany Profit
Transactions-Inventory

The Reporting Entity

Parent
Parent
Financial
Financial
Statements
Statements
_____
_____ _____
_____
_____
_____ _____
_____
_____
_____
_____ _____
_____
_____ _____
_____

Down-stream

Up-stream

Eliminate
Reciprocal Account

Subsidiary
Subsidiary
Financial
Financial
Statements
Statements
_____
_____ _____
_____
_____
_____ _____
_____
_____
_____ _____
_____
_____
_____
_____ _____

Consolidated
Consolidated
Financial
Financial
Statements
Statements
_____
_____ _____
_____
____
____ _____
_____ Identifiable NA
_____
_____ _____
_____ Intangible excess
_____
_____ _____
_____

P
20

20
4

Profit P = 4
recognized all

24

24
6
30

30

Inventory

Inventory

20

24

CoS

20

20
Sales

24

CoS

24

24
Sales

30

Intercompany Transactions
Consolidated Financial Statement:
"intercompany balances and
transaction"
As if this transaction (IPT-Inventory) had
never occured

Intercompany Sales of
Inventory
Profit on IPT-Inventory transaction
Recognized when the merchandise sold to
the third party (outsider).
Deferred when the merchandise still on
hand (UNREALIZED PROFIT )
The ending inventory will become as the
beginning inventory in the next period.
Unrealized profit will be realized
(RECOGNIZED PROFIT) when that
merchandise (beginning inventory) is sold

P
20

20
4
24

24
6
30

30

Parent

Subsidiar
y

CFS

Sales

24

30

30

Cost of
Sales

20

24

20

Gross Profit

10

P
30
P profit recognized
partly, the rest is the
Unrealized Profit

30
6
36

36
30
6

37,50

Sales-purchase transactions between P and S as if never

happenned (36)
End. Invent S =6

P profit that unrealized = 6/36 x 6 = 1

UnRealized Profit = 1

P
30

30
6

Unrealized Profit
6/36 x 6 = 1

36

Sales
CoS

36 - 36

CoS
Inventory

1
-

36
30
6

40

40

Unrealized Profit
12/48 x 8 = 2
Sales
48 CoS
- 48
CoS
Inventory

2
-

8
48

6
48
6+36
12

37,50

Realized Profit
6/36 x 6 = 1
Investment in S 1 CoS
- 1

52,50

Paren
t

Subsi
di

Adjust & Elim

CFS

Sales

36

37,5

a. 36

37.5

Cost of
Sales

30

30

b. 1

INCOME
STAT

Gross
Profit

a. 36

7,5

12,5

BALANCE
SHT
Inventory

25

b 1

a Sales
CoS

36 - 36

b CoS
Inventory

1
-

Adjust & Elim

debit
credit

CFS

52.5

Paren
t

Subsi
di

Sales

48

52,5

a. 48

Cost of Sales

40

42

b. 2

Gross Profit

a 48
c 1

17,5
10.5

Balance
Sheet
Inventory
Investment
in S

35

b 2
c 1

a Sales
CoS

48 - 48

b CoS
Inventory

2
-

c Investment in S
CoS

1 - 1

DOWN-STREAM dan
UPSTREAM

DS

URP belongs to P
IFS will be effected
NCI share will NOT be effected

The merchandise
(EI) in S

US

The merchandises (EI) in P

URP belongs to S
Share of P and NCI will be effected

Effects of DS & US to Share

Parent Subsidia
ry
80%

Sales
600
Cost of Sales
(300)
Gross Profit
300
Expenses
(100)
Parents separate
200
income
Sales between afiliated company $100,000
Subsidiary Net
UNREALIZED Profit in EI 20,000
Income

300
(180)
120
(70)

50

Effects of DS & US
transactions
to NI-S Share
P

DS

80% x (50,000) = 40,000

P profit is deducted by URP 20,000

NI-S
Share

NCI 20% x 50,000 = 10,000

US

80% x (50,000-20,000) = 24,000

NCI

20% x (50,000-20,000) = 6,000

NI-S
Share

How is the impact when the company has the

BEGINNING INVENTORY?

DOWNSTREAM-Unrealized
Profit
Income Statement 31 Des 2011

Porter

Sorter
90%

Sales

100

50

Cost of Sales

(60)

(25)

Gross Profit

40

15

(15)

(5)

25

10

Expenses
Operating income
Income from Sorter
NET INCOME

9
34

10

P sales incl. transaction with Sorter $15,000 with

$6,250 as profit
S Ending inventory incl 40% merchandise from Porter

Entry in Porters book 2011

Investment in Sorter

9,000

Income from Sorter

9,000

IFS = 90% x 10,000 = 9,000

Income from Sorter

2,500

Investment in Sorter
Unrealized Profit

2,500
40% x 6,250 = 2,500

DS

URP-EI
2011

DOWNSTREAM- Realized
Profit
Income Statement 31 Des 2012

Porter

Sorter
90%

Sales

120

60

Cost of Sales

(80)

(40)

Gross Profit

40

20

(20)

(5)

20

15

Expenses
Operating income
Income from Sorter
NET INCOME

13,5
33.5

2010 no transaction between P and S

All beginning Inventory from Porter is sold

15

Entry on Pots book 2012

Investment in Sorter

13,500

Income from Sorter

IFS

13,500

90% x 15,000 = 13,500

Investment in Sorter
Income from Sorter
Realized Profit 40% x 6,250 = 2,500

2,500
2,500

DS

URP-EI
2012

UPSTREAM- UNRealized
Profit 2011
During 2011 Sal Co (Subsidiary, 75%)
sold its merchandise to Par Co (Parent)
$20,000. Cost of sales $7,500. At the
end of the year, 40% of that
mechandise still on hand.
Net Income Sal during 2009 was
$50,000

Entries in Pars book 2011

Investment in Sal

37,500

Income from Sal

IFS

37,500

75% x 50,000 = 37,500

Income from Sal

3,750

Investment in Sal
Inventory di Par 40% x $20,000 = $8,000
Total URP = 40% x ($20,000-$7,500)= $5,000
UNRealized Profit 75% x 5,000 = 3,750

3,750

US

URP-EI
2011

UPSTREAM- Realized Profit

2010
2012
No more transactions between
Par and Sal
Par inventory purchased from Sal is
sold

Entries in Pars book 2012

Investment in Sal

45,000

Income from Sal

IFS

45,000

75% x 60,000 = 45,000

Investment in Sal
Income from Sal
Realized Profit 75% x 5,000 = 3,750

3,750
3,750

US

RP-BI
2012