Manuel Angelo M.
Petalcorin
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Roxan
Danica
The
Last
Dizon
The Lami2x!
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Karen
Ranalan
Nathaniel
Maghinay
Jobert
Carriaga
Amender!
The Stuntman!
Jeasan
Santos
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Uhmmmm
Pinakagwapo? (no)
Charlene
Sampilo
TISOY!
Manuel Angelo M. Petalcorin
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Johanna
Fajardo
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Intercompany
transactions Inventories
Group 1
Consolidated
Financial
Separate
Separate
Financial
Financial
Statement
Downstream
Statement
Statement
s
Intercompany
Subsidiary
Parent
transactions
Upstream
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General Overview
We are awesome!
Intercompany Sales
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At Cost
Merchandise sometimes is sold to related affiliates at the seller's cost.
The inventory amounts at the end of the period require no adjustment
for consolidation
What we are
At time of sale to outsiders, the amount recognized as cost of goods
talking about. sold by the affiliate making the outside sale is the cost to the
consolidated entity.
An eliminating entry is needed to remove the intercompany sale and
the related cost of goods sold recorded by the seller.
This avoids overstating these two accounts.
Consolidated net income is not affected by the eliminating entry.
Intercompany Sales
At a Profit or Loss
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Companies usually mark up sale of inventory to affiliates by a certain
percentage of cost.
What we are
talking about.
The elimination process must remove the effects of such sales from
the consolidated statements.
The working paper eliminations needed for consolidation in the period
of sale have two goals:
Elimination of the income statements effects of the
intercompany sale in the period of sale, removing the
sales revenue from the intercompany sale and the
related COGS recorded by the selling affiliate.
Elimination from the inventory on the SFP of any
profit or loss on the intercompany sale that has not
been confirmed or realized by resale of inventory to
outsiders.
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Downstream Sale of Inventory
Downstream Sale of Inventory
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Intercompany sale of merchandise from a parent company to its subsidiaries
For consolidation purposes, profits recorded on an intercompany inventory sale are realized in
the period in which the inventory is resold to outsiders.
Until the point of resale, all intercompany profits must be deferred.
Consolidated net income must be based on the realized income of the selling affiliate.
If the intercompany sales of merchandise are made by the parent company or by a wholly
owned subsidiary, there is no effect on any NCI in net income or loss, because the
selling affiliate does not have NCI.
When a company sells merchandise to an affiliate, one of the two situation results:
1. the merchandise is resold to outsiders during the same period
2. the merchandise is resold to outsiders during the next period to unrealized profit in
ending inventory.
Resale in the year of Intercompany Sale
Sample Problem
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On April 1, 2010, Pete Corporation sold
merchandise costing P8,000 to Sake Company for
P10,000 or at a gross profit of 20% of sales.
Assume further that on November 7,2010, Sake
Company sells the merchandise to outsiders for P
15,000.
Parent and Subsidiary Companies
entries
Books of Pete Corporation
2010
April 1
(1)
Cash
Sales
10,000
10,000
To record sale of merchandise to Sake Co.
(2)
Cost of goods sold
Inventory
8,000
8,000
To record cost of inventory sold
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Parent and Subsidiary Companies
entries
Books of Sake Company
2010
April 1
(3)
Inventory
Cash
10,000
10,000
To record purchase inventory from Pete
Nov. 7 (4)
Cash
Sales
15,000
15,000
To record sale of inventory to outsiders
(5)
Cost of goods sold
Inventory
10,000
10,000
To record cost of inventory sold to outliers
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Parent and Subsidiary Companies
entries
Books of Sake Company
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Item
Pete
Corporation
Sake
Corporation
Unadjusted
Balances
Consolidated
Amounts
Sales
10000
15000
25000
15000
COGS
8000
10000
18000
8000
Gross Profit
2000
5000
7000
7000
Working Paper Elimination Entries
E (7) Sales
10,000
Cost of Goods Sold
10,000
To eliminate intercompany sale of inventory
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Resale in subsequent following Intercompany Sale:
Unrealized Intercompany Profit in Ending Inventories
Sample Problem
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On April 1, 2010, Pete Corporation sold
merchandise costing P8,000 to Sake Company for
P10,000 or at a gross profit of 20%, out of which
P4,000 remained unsold by Sake Company on
December 31,2010.
Parent and Subsidiary Companies
entries
Books of Pete Corporation
2010
April 1 (1)
Cash
Sales
10,000
10,000
To record sale of merchandise to Sake Co.
(2)
Cost of goods sold
Inventory
8,000
8,000
To record cost of inventory sold
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Parent and Subsidiary Companies
entries
Books of Sake Company
2010
April 1
(3)Inventory
10,000
Cash
10,000
To record purchase inventory from Pete
(6)Cash
7,500
Sales
7,500
To record sales to outsiders
(7)Cost of goods sold
Inventory
6,000
6,000
To record cost of goods sold
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Parent and Subsidiary Companies
entries
Books of Sake Company
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Selling Price
Cost
Gross Profit
Beg. Invty
Add: Sales
P10000
P8000
P2000
Totals
P10000
P8000
P2000
4000
3200
800
P6000
P4800
P1200
Less: Ending Invty
COGS
Working Paper Elimination Entries
E (8)
Sales
10,000
Cost of Goods Sold
10,000
To eliminate intercompany sale of inventory
E (9)
Cost of goods sold
Inventory
800
800
To eliminate intercompany sale of inventory
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Intercompany Profit in Beginning and Ending Inventories
Sample Problem
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Continuing our illustration in the preceeding
section, assume that during the year 2011, Pete
sold again merchandise to Sake for P25,000 at a
gross margin of 20%. Of this merchandise P6000
remains in the ending inventories of Sake on
December 31, 2011.
Parent and Subsidiary Companies
entries
Books of Sake Company
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Selling Price
Cost
Gross Profit
Beg. Invty
4000
3200
800
Add: Sales
25000
20000
5000
Totals
29000
23200
5800
6000
4800
1200
23000
18400
4600
Less: Ending Invty
COGS
Working Paper Elimination Entries
E (10) Sales
25,000
Cost of Goods Sold
25,000
To eliminate intercompany sale of inventory
E (9)
Cost of goods sold
Inventory
1200
1200
To eliminate unrealized inventory profit
E (12)
Retained Earnings. Jan.1- Pete
Cost of goods sold
800
To eliminate realized inventory profit
800
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Computation and Allocation of
Consolidated Net Income
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Pete's net income from own operations (excluding dividend income) P80,000
Realized Profit in [Link] (Downstream Sale)
800
Unrealized profit in ending invty (downstream sale) (1,200)
Pete's Realized net income from outsiders
Sake's net income from own operations
79,600
50,000
Consolidated Net Income 129,600
Attributable to NCI (50,000 x 20%)
10,000
Attributable to parent shareholders 119,600
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Upstream Sale of Inventory
UPSTREAM SALE OF INVENTORY
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Intercompany sales from subsidiaries to the parent company
When an upstream sale of inventory occurs and the inventory is
resold by th parent to outsiders during the same period, all the
parent entries and the eliminating entries in the consolidated
working paper are identical to those in the downstream case.
What we are
When the inventory is not resold to outsiders before the end of the
talking about. period, working paper elimination entries are different from the
downstream case only by the apportionment of the unrealized
intercompany to both the controlling and NCI.
The intercompany profit in an upstream sale is recognized by the
subsidiary and shared between the controlling interest and NCI.
Therefore, the elimination of the unrealized intercompany profit must
reduse the interests of both ownership groups until the profit is
realized by resale of the inventory to outsiders.
Unrealized Intercompany Profit in Ending Inventories
Sample Problem
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Assume that Sake Company (an 80% owned subsidiary)
during the year ended December 31,2010 sold
merchandise to Pete Corporation at a gross margin of
20%. Sales by Sake to Pete for the year totaled P10,000
of which P4,000 remained unsold by Pete on December
31,2010.
Parent and Subsidiary Companies
entries
Books of Sake Corporation
2010
April 1 (1)
Cash
Sales
10,000
10,000
To record sale of merchandise to Pete Co
(2)
Cost of goods sold
Inventory
8,000
8,000
To record cost of inventory sold
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Parent and Subsidiary Companies
entries
Books of Pete Corporation
2010
April 1
(3)Inventory
Cash
10,000
10,000
To record purchase inventory from Sake
Nov. 7
(4)Cash
Sales
15,000
15,000
To record sale of inventory to outsiders
(5)Cost of goods sold
Inventory
10,000
10,000
To record cost of inventory sold to outliers
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Working Paper Elimination Entries
E (7) Sales
10,000
Cost of Goods Sold
10,000
To eliminate intercompany sale of inventory
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NCI in Net Income of Subsidiary
Sake's net income (assumed)
P 20,000
Unrealized intercompany Profit in ending invty
Sake's realized income
800
19,200
NCI in net income of subsidiary (19,200 x 20%)
P 3,840
Consolidated Net Income
Pete's net income (excluding dividend income)
P50,000
Sake's realized net income:
Sake's net income
P20,000
Unrealized intercompany profit in ending invty
Consolidated net income
Attributable to NCI
Attributable to parent shareholders
(800)
P 69,200
3,840
P 65,360
19,200
Unrealized Intercompany Profit in Ending Inventories
Sample Problem
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Assume that Sake Company (an 80% owned subsidiary)
during the year ended December 31,2010 sold
merchandise to Pete Corporation at a gross margin of
20%. Sales by Sake to Pete for the year totaled P10,000
of which P4,000 remained unsold by Pete on December
31,2010.
Intercompany Profit in Beginning and Ending Inventories
Sample Problem
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On April 1, 2010, Sake Corporation sold merchandise costing P8,000
to Pete Company for P10,000 or at a gross profit of 20% of sales.
Assume further that on November 7,2010, Sake Company sells the
merchandise to outsiders for P 15,000.
Assume that during the year 2011, Sake sold again merchandise
to Pete for P25,000 at a gross margin of 20%. Of this merchandise
P6000 remains in the ending inventories of Pete on December 31,
2011.
Working Paper Elimination Entries
E (10) Sales 25,000
Cost of Goods Sold 25,000
To eliminate intercompany sale of inventory
E (9) Cost of goods sold 1200
Inventory 1200
To eliminate unrealized inventory profit
E (12) Retained Earnings. Jan.1- Pete
NCI 160
Cost of goods sold 800
To eliminate realized inventory profit
640
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NCI in Net Income of Subsidiary - 2011
Sake Company net income
P20,000
Realized Profit in [Link]
800
Unrealized profit in ending invty
Sake's realized income
(1,200)
19,600
NCI in net income of subsidiary (19,600 x 20%)
P 3, 920
Consolidated Net Income - 2011
Pete's net income from own operations
P50,000
Sake's realized net income:
Sake's net income
Realized profit in beg. Invty
Unrealized profit in ending invty
Consolidated net income
Attributable to NCI
Attributable to parent shareholders
P20,000
800
(1,200)
19,600
P 69,600
3,920
P 65,680
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Comprehensive Ilustration
On April 1, 2010, Pete Corporation sold merchandise costing
P8,000 to Sake Company for P10,000 or at a gross profit of
20% of sales. Assume further that on November 7,2010,
Sake Company sells the merchandise to outsiders costing
6,000 for 8,400.
Add Image
Comprehensive Ilustration
Pete company Sake Company
Beg inventory
40,000.00
35,000.00
Purchases from outside100,000.00
70,000.00
Ending inventory 20,000.00
45,000.00
The beginning inventory of Sake company includes 4,000 that
was purchase last year from Pete Company.
Requirements: For the December 31, 2010 compute the
following.
1. Consolidated Sales.
2. Consolidated COGS.
3. Consolidated net income.
Thats all. Thank you very much!
Any Questions?