Professional Documents
Culture Documents
Intercompany
Profit
Transactions
Inventories
5-2
Objectives (cont.)
5. Adjust noncontrolling interest amounts in the
presence of intercompany inventory profits.
5-3
1: INTERCOMPANY
INVENTORY PROFITS
5-4
Intercompany Transactions
For consolidated financial statements
intercompany balances and transactions shall be
eliminated. [FASB ASC 810-10-45-1]
5-5
5-6
No Intercompany Profits in
Inventories
During 2011, Pet sold goods costing $1,000 to its
subsidiary, Sim, at a gross profit of 30%. Sim had none of
this inventory on hand at the end of 2011. The worksheet
entry for 2011:
Sales (-R, -SE)
1,429
1,429
5-7
1,500
1,500
80
80
5-8
650
650
60
Inventory (-A)
60
24
24
5-9
2: UPSTREAM &
DOWNSTREAM INVENTORY
SALES
5-10
Downstream
Sales
Parent sells to
subsidiary
Subsidiary
1
Parent
Subsidiary
2
Subsidiary sells
to parent
Subsidiary
3
Upstream Sales
5-11
XXX
XXX
XX
Inventory (-A)
XX
XX
XX
5-12
5-13
$5,200
(450)
$4,750
CI 80% share
$3,800
(60)
24
Defer profits in EI
Recognize profits in BI
Income
recognized
(60)
$3,764
24
$4,714
$2,400
Income from
subsidiary
NCI 20% share
$950
Subsidiary dividends
$3,000
When parent makes the IC
sale, the impact of deferring
and recognizing profits falls
all to the parent.
$600
5-14
$5,200
(450)
$4,750
(60)
24
$3,800
(48)
19.2
$3,771.2
$2,400
Income from
subsidiary
NCI 20% share
$4,714
$950.0
Subsidiary dividends
$3,000
(12.0)
4.8
$942.8
$600
5-15
3: UNREALIZED PROFITS
IN ENDING INVENTORIES
5-16
XXX
XXX
5-17
Parent Accounting
Pot owns 90% of Sot acquired at book value
(no amortizations). During the current year,
Sot reported $10,000 income. Pot sold goods to
Sot during the year for $15,000 including a
profit of $6,250. Sot still holds 40% of these
goods at the end of the year.
Unrealized profit in ending inventory
40%(6,250) = $2,500
Pot's Income from Sot
90%(10,000) 2,500 unrealized profits = $6,500
Noncontrolling interest share
10%(10,000) = $1,000
Pearson Education Limited 2015
5-18
Entries
Pot's journal entry to record income (net of
unrealized profit).
Investment in Sot (+A)
6,500
6,500
15,000
15,000
2,500
2,500
5-19
Sales
Income from Sot
Pot
Sot
$100.
0
$50.0
6.5
Cost of sales
(60.0) (35.0)
Expenses
(15.0)
Consol
$135.0
6.5
0.0
2.5
15.
0
(82.5)
(20.0)
1.0
$31.5 $10.0
CR
15.0
(5.0)
Noncontrolling interest
share
Controlling interest
share
DR
(1.0)
$31.5
5-20
What if?
If the sales had been upstream, by Sot to Pot:
Unrealized profits in ending inventory
40%(6,250) = $2,500
Pot's Income from Sot
90%(10,000 2,500) = $6,750
Noncontrolling interest share
10%(10,000 2,500) = $750
Upstream profits impact both:
Controlling interest share
Noncontrolling interest share
5-21
4: RECOGNIZING PROFITS
FROM BEGINNING
INVENTORIES
5-22
Become
5-23
5: IMPACT ON
NONCONTROLLING
INTEREST
5-24
Upstream sales
Share impact between parent and noncontrolling
interest
5-25
Upstream sales:
Income from sub
= CI%(Sub's NI Profits in EI + Profits in BI)
5-26
$1,250
$600
2012
Salt
Perry
$705 $1,500
$280
$600
Salt
$745
$300
5-27
$420
$600
400
Excess
Allocated to:
Inventory
$200
Unamort
Amort
Unamort
Amort
Unamort
1/1/11
2011
1/1/12
2012
12/31/12
50
(50)
Building
100
(5)
95
(5)
90
Goodwill
50
50
50
200
(55)
145
(5)
140
5-28
$705
(55)
$650
CI 70% share
$455
($28)
$427
Defer profits in EI
Income recognized
(40)
$610
$196
NCI 30% share
$195
Subsidiary dividends
$280
($12)
$183
$84
5-29
420
Cash (-A)
420
196
196
427
427
5-30
700
700
40
Inventory (-A)
40
427
Dividends (+SE)
196
231
5-31
2011 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings & dividends
Noncontrolling interest share (-SE)
183
Dividends (+SE)
84
200
200
Inventory (+A)
50
Building (+A)
100
Goodwill (+A)
50
420
180
5-32
2011 Entries (3 of 3)
6. Amortize fair value/book value differentials
Cost of sales (E, -SE)
50
Inventory (-A)
Depreciation expense (E, -SE)
Building (-A)
50
5
5
5-33
$745
(5)
$740
CI 70% share
$518
($14)
$28
Defer profits in EI
(20)
40
Income recognized
$760
Subsidiary dividends
$300
$532
$210
Income from
Salt
NCI 30% share
$222
($6)
$12
$228
$90
5-34
210
210
532
532
5-35
900
900
20
Inventory (-A)
Investment in Salt (+A)
20
28
interest (-SE)
12 bring
3.Noncontrolling
Eliminate income
& dividends from sub. and
Investment
account
Cost of sales (-E,
+SE) to its beginning balance
40
532
Dividends (+SE)
210
322
5-36
2012 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share (-SE)
228
Dividends (+SE)
90
138
200
625
Inventory (+A)
Building (+A)
95
Goodwill (+A)
50
679
5-37
2012 Entries (3 of 3)
6. Amortize fair value/book value differentials
Depreciation expense (E, -SE)
Building (-A)
5-38