Chapter 5: Intercompany Profit

Transactions – Inventories
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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 Intercompany Profits –
Inventories: Objectives
1. Understand the impact of intercompany profit
for inventories on preparation of consolidation
working papers.
2. Apply the concepts of upstream versus
downstream inventory transfers.
3. Defer unrealized inventory profits remaining
in ending inventory of either the parent or
subsidiary.

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 Objectives (cont.)
4. Recognize realized, previously deferred
inventory profits in the beginning inventory of
either the parent or subsidiary.
5. Adjust the calculations of noncontrolling
interest amounts in the presence of
intercompany inventory profits.

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Intercompany Profit Transactions – Inventories
1: Intercompany Inventory Profits

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 Intercompany Sales of Inventory
• Laba antar perusahaan dari penjualan persediaan
– Seluruhnya diakui jika barang telah dijual
kembali kepada pihak luar (outsiders)
– Menunda jika barang masih dipegang dalam
persediaan
• Sebelumnya laba yang di tunda dalam persediaan
awal telah diakui
• Pertimbagan sistem perhitungan persediaan FIFO
– Persediaan awal dijual terlebih dahulu
– Persediaan akhir dari periode lancar

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 No Intercompany Profits in
Inventories
• Selama tahun 2009, Pretty menjual barang
dengan harga $1,000 kepada perusahaan
anaknya. Gross profit Simple sebesar 30%.
Simple tidak mempunyai persediaan di tangan
pada akhir tahun 2009. Ayat jurnalnya adalah
Sales 1,429
Cost of sales 1,429
Sales = $1,000 / (1-30%) = $1,429

• Semua penjualan persediaan antar perusahaan

telah dijual kepada pihak luar, jadi dilakukan
pengurangan harga jual dan HPP
– Penjualan Pretty berkurang $1,429.
– HPP Simpleberkurang $1,429.
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 Intercompany Profits Only in
Ending Inventories
• Akhir tahun 2009, Paul menjual barang seharga
$500 kepada perusahaan anak Sal, dengan laba
kotor 25%. Sal tidak mempunyai persediaan di
akhir tahun 2009.
• Selama tahun 2010, Paul menjual tambahan
barang sebesar $900 kepada Sal dengan laba
kotor 40%. Sal mempunyai persediaan $200
pada 12/31/2010. Ayat jurnal tahun 2010:
Sales 1,500
Cost of sales 1,500
Sales = $900 / (1-40%) = $1,500
Cost of sales 80
Inventory 80
Ending inventory profit = $200 x 40%
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 Intercompany Profits Beginning
and Ending Inventories
Akhir tahun 2009, Pam menjual barang sebesar $300 kepada
perusahaan anaknya, Sir dengan mark up sebesar 25%. Sir
mempunyai persediaan sebesar $120 pada akhir tahun 2009.
Selama tahun 2010, Pam menjual barang sebesar $500 kepada
Sir dengan mark up30%. Sir mempunyai persediaan sebesar
$260 pada 12/31/2010. Ayat jurnal tahun 2010:

Sales 650
Cost of sales 650
Sales = $500 + 30%($500) = $650
Cost of sales 60
Inventory 60
Ending inv. profits = $260 x 30%/130%
Investment in Subsidiary 24
Cost of sales 24
Begin. inv. profits = $120 x 25%/125% = $24
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Intercompany Profit Transactions – Inventories
2: Upstream & Downstream
Inventory Sales

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 Upstream and Downstream Sales

Downstream
Sales
Parent

Subsidiary sells
Parent sells to to parent
subsidiary

Subsidiary 1 Subsidiary 2 Subsidiary 3

Upstream Sales

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 Intercompany Inventory Sales
• Ayat jurnal untuk mengeliminasi laba antar
perusahaan penjualan downstream
Sales XXX
Cost of sales XXX
For the intercompany sales price
Cost of sales XX
Inventory XX
For the profits in ending inventory
Investment in Subsidiary XX
Cost of sales XX
For the profits in beginning inventory

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 Intercompany Inventory Sales
• Ayat jurnal untuk mengeliminasi laba antar
perusahaan penjualan upstream
Sales XXX
Cost of sales XXX
For the intercompany sales price
Cost of sales XX
Inventory XX
For the profits in ending inventory
Investment in Subsidiary XX
Non Controlling Interest XX
Cost of sales XX
For the profits in beginning inventory

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 Data for Example
• Untuk tahun yang berakhir pad 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

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 Income Sharing with Downstream
Sales – PARENT Makes Sale
Subsidiary net income $5,200 CI 80% share
Current amortizations (450) $3,800
Adjusted income $4,750 (60)
    24
Defer profits in EI (60) $3,764 Income from subsidiary
Recognize profits in BI 24  
Income recognized $4,714 $2,400
NCI 20% share
   
Subsidiary dividends $3,000
$950
When parent makes the IC  
sale, the impact of deferring  
and recognizing profits falls all  
to the parent. $600
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 Intercompany Inventory Sales
• Ayat jurnal untuk mengeliminasi laba antar
perusahaan penjualan downstream
Sales 650
Cost of sales 650
For the intercompany sales price
Cost of sales 60
Inventory 60
For the profits in ending inventory
Investment in Subsidiary 24
Cost of sales 24
For the profits in beginning inventory

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 Income Sharing with Upstream
Sales – SUBSIDIARY Makes Sale
Subsidiary net income $5,200 CI 80% share
Current amortizations (450) $3,800
Adjusted income $4,750 (48)
    19.2
Defer profits in EI (60) $3,771.2 Income from subsidiary
Recognize profits in BI 24  
Income recognized $4,714 $2,400
    NCI 20% share
Subsidiary dividends $3,000
$950.0
When subsidiary makes the IC sale,
the impact of deferring and (12.0)
recognizing profits is split among 4.8 
controlling and noncontrolling  $942.8
interests.
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 Intercompany Inventory Sales
• Ayat jurnal untuk mengeliminasi laba antar
perusahaan penjualan upstream
Sales 650
Cost of sales 650
For the intercompany sales price
Cost of sales 60
Inventory 60
For the profits in ending inventory
Investment in Subsidiary 19,2
Non Controlling Interest 4,8
Cost of sales 24
For the profits in beginning inventory

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Intercompany Profit Transactions – Inventories
3: Unrealized Profits in Ending
Inventories

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 Ending Inventory on Hand
• Laba antar perusahaan pada persediaan akhir
– Dieliminasi pada akhir tahun
• Ayat jurnalnya
Cost of sales XXX
Inventories XXX
Untuk laba yang belum direalisasi

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 Parent Accounting
Porter memiliki 90% kepemilikan Sorter yang diakuisisi
pada nilai buku. Selama tahun berjalan, Sorter
melaporkan laba sebesar $10,000. Porter menjul
persediaan kepada Sorter dalam satu tahun sebesar
$15,000 termasuk laba kotor $6,250. Sorter masih
memegang 40% persediaan akhir pada akhir tahun.
• Laba yang belum terealisasi dalam persediaan akhir
40%(6,250) = $2,500
• Laba Porter dari Sorter
90%(10,000) – 2,500 unreal. Profits = $6,500
• Noncontrolling interest share
10%(10,000) = $1,000
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 Entries
• Ayat jurnal Porteruntuk melaporkan laba dari anak

Investment in Sorter 6,500

• AyatIncome
jurnalfrom
untuk mengeliminasi penjualan antar 6,500
Sorter
perusahaan dan laba yang belum direalisasi

Sales 15,000
Cost of sales 15,000
Cost of sales 2,500
Inventory
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 • Mengeliminasi NCI share

NCI share 1,000

NCI 1,000

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 Worksheet – Income Statement
  Porter Sorter DR CR Consol
Sales $100.0 $50.0 15.0   $135.0
Income from Sorter 6.5   6.5   0.0
Cost of sales (60.0) (35.0) 2.5 15.0 (82.5)
Expenses (15.0) (5.0)     (20.0)
Noncontrolling interest share     1.0   (1.0)
Controlling interest share $31.5 $7.5     $31.5

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 What if?
Jika penjualan dilakukan upstream, dari Sorter
kepada 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
• Laba dari upstream akan berdampak pada
keduanya (induk dan anak)

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Intercompany Profit Transactions – Inventories
4: Recognizing Profits from
Beginning Inventories

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 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!

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Intercompany Profit Transactions – Inventories
5: Impact on Noncontrolling Interest

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 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
noncontrolling interest

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 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)
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 Upstream Example with
Amortization
Perry mengakuisisi 70% kepemilikan pada 1/1/2009 sebesar $420
ketika ekuitas Salt sama terdiri dari modal saham $200dan laba
ditahan $200. Persediaan Salt's dinilai terlalu rendah $50 dan
bangunan dinilai terlalu rendah sebesar $ 100 dengan mur
ekonomis 20. Kelebihan dilakoasikan sebagaigoodwill.

2009 2010
Perry Salt Perry Salt
SelamaSeparate income
tahun 2009, $1,250
Salt menjual $705
barang $1,500
sebesar $745
$700 kepada
Dividends
dengan $600 akhir
mark up 20%. Persediaan $280 Perry
$600 $300
sebesar $240.
Pada tahun 2010, Salt menjual pers barang sebesar $900 kepada
dengan mark up 25% Perry masih mempunyai persediaan akhir
sebesar $100.

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 Analysis and Amortization
Cost of 70% of Salt $420
Implied value of Salt 420/.70 $600
Book value 200 + 200 400
Excess $200

  Unamort Amort Unamort Amort Unamort

Allocated to: 1/1/09 2009 1/1/10 2010 12/31/10
Inventory 50 (50) 0 0 0
Building 100 (5) 95 (5) 90
Goodwill 50 0 50 0 50
  200 (55) 145 (5) 140

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 2009 Income Sharing (Upstream)
Salt's net income $705 CI 70% share
Current amortizations (55) $455
Adjusted income $650 ($28)
Income from Salt
$427
Defer profits in EI  
240x(20%÷120%) (40)
$196
Income recognized $610
 
NCI 30% share
  $195
Subsidiary dividends $280 ($12)
$183
 
$84
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 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 427
Income from Salt 427
For share of income
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 2009 Worksheet Entries
1. Adjust for errors & omissions - none
2. Eliminate intercompany profits and losses
Sales 700
Cost of sales 700
Cost of Sales 40
Inventory 40
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Salt 427
Dividends 196
Investment in Salt 231
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 2009 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share 183
Dividends 84
Noncontrolling interest 99
5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock 200
Retained earnings 200
Inventory 50
Building 100
Goodwill 50
Investment in Salt 420
Noncontrolling interest 180
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 2009 Entries (3 of 3)
6. Amortize fair value/book value differentials
Cost of sales 50
Inventory 50
Depreciation expense 5
Building 5

7. Eliminate other reciprocal balances – none

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 2010 Income Sharing (Upstream)
   
Salt's net income $745 CI 70% share
Current amortizations (5) $518
Adjusted income $740 ($14)
    $28
Defer profits in EI (20) $532 Income from Salt
Realize profits from BI 40  
Income recognized $760 $210
    NCI 30% share
Subsidiary dividends $300 $222
($6)
$12
$228
 
$90
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 Perry's 2010 Equity Entries
Cash 210
Investment in Salt 210
For dividends received
Investment in Salt 532
Income from Salt 532
For share of income

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 2010 Worksheet Entries
1. Adjust for errors & omissions - none
2. Eliminate intercompany profits and losses
Sales 900
Cost of sales 900
Cost of Sales 20
Inventory 20
Investment in Salt 28
Noncontrolling interest 12
Cost of sales 40
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Salt 532
Dividends 210
Investment in Salt 322
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 2010 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share 228
Dividends 90
Noncontrolling interest 138
5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock 200
Retained earnings 625
Inventory 0
Building 95
Goodwill 50
Investment in Salt 679
Noncontrolling interest 291
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 2010 Entries (3 of 3)
6. Amortize fair value/book value differentials
Depreciation expense 5
Building 5
7. Eliminate other reciprocal balances – none

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