Professional Documents
Culture Documents
CHAPTER
6:
Intercompan
y Inventory
and Land
Profits
Prepared by
Shannon Butler, CPA,
Carleton University
Learning Objectives
LO1 Describe the effect on consolidated profit of the
elimination of intercompany revenues and
expenses.
LO2 Prepare consolidated financial statements that
reflect the elimination and subsequent realization
of upstream and downstream intercompany profits
in inventory.
LO3 Explain how the cost, revenue recognition, and
matching principles are used to support
adjustments for intercompany transactions when
preparing consolidated financial statements.
2
Learning Objectives
LO4 Prepare consolidated financial statements that
reflect the elimination and subsequent realization of
upstream and downstream intercompany profits in land.
LO5 Prepare the journal entries under the equity
method to reflect the elimination and subsequent
realization of intercompany profits in inventory and land.
LO6 Analyze and interpret financial statements involving
intercompany transactions.
LO7 (Appendix 6A) Prepare consolidated financial
statements when land is remeasured to fair value each
reporting period.
3
LO1
LO1
LO1
These profits are unrealized because they are only within the
combined entity, they are not objectively measurable, and are
not with an arms-length outsider.
Examples of Intercompany
Revenue & Expenses
LO1
Examples of Intercompany
Revenue & Expenses
LO1
Intercompany Profits in
Assets
LO1
Upstream versus
Downstream
LO1
10
LO1
LO1
LO1
13
Consolidated Financial
Statements
LO2, LO4
Consolidated Financial
Statements
LO2, LO4
15
Consolidated Financial
Statements
LO2, LO4
Exhibit 6.4
16
LO3
17
Intercompany Profits in
Inventory
LO5
Intercompany Profits in
Inventory
LO5
19
Consolidated Financial
Statements
LO2, LO4
20
Consolidated Financial
Statements
LO2, LO4
Exhibit 6.7
300 (a)
180
Attributable to
Shareholders of parent $ 7,002 (d)
Non-controlling interest (10% x 3,280)
328 (e)
When the profits are realized they are credited to the income of the original seller.
21
Consolidated Financial
Statements
LO2, LO4
$ 1,730 (h)
22
Consolidated Financial
Statements
LO2, LO4
PARENT COMPANY
CONSOLIDATED INCOME STATEMENT
for the Year Ended December 31, Year 5
Sales (25,000 + 12,000)
$37,000
Cost of sales (16,000 + 5,500 [5a] 300)
21,200
Miscellaneous expenses (2,350 + 1,400)
3,750
Income tax expense (2,600 + 2,000 + [5b] 120)
4,720
29,670
Net Income
$ 7,330
Attributable to
Shareholders of parent (5d)
$ 7,002
Non-controlling interest (5e)
328
The unrealized profits from the end of Year 4 are released into consolidated Income in Year 5.
PARENT COMPANY
CONSOLIDATED BALANCE SHEET
December 31, Year 5
Inventory (9,900 + 7,500)
$17,400
Assets miscellaneous (22,800 + 20,800)
43,600
$61,000
Liabilities (14,000 + 11,000)
Common shares
Retained Earnings (5g)
Non-controlling interest (5h)
$25,000
15,000
19,270
1,700
$61,000
23
Intercompany Inventory
Profits: Parent Selling
LO5
In subsequent year:
Cost of goods sold is
decreased as beginning
inventory is decreased to
original cost
established
25
Losses on Intercompany
Transactions
LO5
26
LO4
LO4
28
LO4
LO6
no income effect
The separate-entity statements under the cost
method are the same as the equity method
statements.
Except for the investment account, retained
earnings and investment income