To accompany Advanced Accounting, 11th edition by Beams, Anthony, Bettinghaus, and Smith Chapter 5:...
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Transcript of To accompany Advanced Accounting, 11th edition by Beams, Anthony, Bettinghaus, and Smith Chapter 5:...
Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
to accompanyAdvanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Chapter 5:
Intercompany Profit Transactions –
Inventories
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Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Intercompany Profits – Inventories: Objectives
1. Understand the impact of intercompany profit in inventories on preparing consolidation workpapers.
2. Apply the concepts of upstream versus downstream inventory transfers.
3. Defer unrealized inventory profits remaining in the ending inventory.
4. Recognize realized, previously deferred, inventory profits in the beginning inventory.
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Objectives (cont.)
5. Adjust the calculations of noncontrolling interest amounts in the presence of intercompany inventory profits.
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1: INTERCOMPANY INVENTORY PROFITS
Intercompany Profit Transactions – Inventories
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Intercompany Transactions
For consolidated financial statements “intercompany balances and transactions shall be
eliminated.” [FASB ASC 810-10-45-1]Show income and financial position as if the intercompany transactions had never taken place.
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Intercompany Sales of Inventory
Profits on intercompany sales of inventory Recognized if goods have been resold to outsiders Deferred if the goods are still held in inventory
Previously deferred profits in beginning inventory are recognized in the period the goods are sold. Assuming FIFO
Beginning inventories are sold Ending inventories are from current purchases
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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:
All intercompany sales of inventories have been resold to outside parties, so remove the full sales price from both sales and cost of sales.
Pet's sales are reduced $1,429.Sim's cost of sales are reduced $1,429.The same entry is used if Sim sells to Pet.
Sales (-R, -SE) 1,429 Cost of sales (-E, +SE) 1,429
Eliminate intercompany sales = $1,000 / (1-30%) = $1,429
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Intercompany Profits Only in Ending Inventories
Last year, 2011, Pal sold goods costing $500 to its subsidiary, Sal, at a gross profit of 25%. Sal had none of this inventory on hand at the end of 2011.
During 2012, Pal sold additional goods costing $900 to Sal at a gross profit of 40%. Sal has $200 of these goods on hand at 12/31/2012. Worksheet entries for 2012:
Sales (-R, -SE) 1,500 Cost of sales (-E, +SE) 1,500
Eliminate intercompany sales = $900 / (1-40%) = $1,500Cost of sales (E, -SE) 80
Inventory (-A) 80Defer profit in ending inventory = $200 x 40%
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Intercompany Profits Beginning and Ending Inventories
Last year, 2011, Pam sold goods costing $300 to its subsidiary, Sir, at mark-up of 25%. Sir had $120 of this inventory on hand at the end of 2011.
During 2012, Pam sold additional goods costing $500 to Sir at a 30% mark-up. Sir has $260 of these goods on hand at 12/31/2012. Worksheet entries for 2012:Sales (-R, -SE) 650
Cost of sales (-E, +SE) 650Eliminate intercompany sales = $500 + 30%($500) = $650
Cost of sales (E, -SE) 60 Inventory (-A) 60
Defer profits in ending inventory = $260 x 30%/130%Investment in Subsidiary (+A) 24
Cost of sales (-E, +SE) 24Realize profits from beginning inventory = $120 x 25%/125% = $24
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2: UPSTREAM & DOWNSTREAM INVENTORY SALES
Intercompany Profit Transactions – Inventories
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Downstream Sales
Parent sells to subsidiary
Subsidiary sells to parent
Upstream Sales
Upstream and Downstream Sales
Parent
Subsidiary 1 Subsidiary 2 Subsidiary 3
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Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Intercompany Inventory Sales
The worksheet entries for eliminating intercompany profits for downstream sales
For upstream sales, the last entry would include a debit to noncontrolling interest, sharing the realized profit between controlling and noncontrolling interests.
Sales (-R, -SE) XXX Cost of sales (-E, +SE) XXX
For the intercompany sales priceCost of sales (E, -SE) XX
Inventory (-A) XXFor the profits in ending inventoryInvestment in Subsidiary (+A) XX
Cost of sales (-E, +SE) XXFor the profits in beginning inventory
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Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Data for Example
For the year ended 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 profit in ending inventory $60 IC profit in beginning inventory $24
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CI 80% share$3,800
(60)24
$3,764
$2,400 NCI 20% share
$950
$600
Income Sharing with Downstream Sales – PARENT Makes Sale
Subsidiary net income $5,200 Current amortizations (450)Adjusted income $4,750 Defer profits in EI (60)Recognize profits in BI 24 Income recognized $4,714 Subsidiary dividends $3,000
When parent makes the IC sale, the impact of deferring and recognizing profits falls all to the parent.
Income from subsidiary
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NCI 20% share
$950.0(12.0)4.8
$942.8
$600
CI 80% share$3,800
(48)19.2
$3,771.2
$2,400
Income Sharing with Upstream Sales – SUBSIDIARY Makes Sale
Subsidiary net income $5,200 Current amortizations (450)Adjusted income $4,750 Defer profits in EI (60)Recognize profits in BI 24 Income recognized $4,714 Subsidiary dividends $3,000
When subsidiary makes the IC sale, the impact of deferring and recognizing profits is split among controlling and noncontrolling interests.
Income from subsidiary
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3: UNREALIZED PROFITS IN ENDING INVENTORIES
Intercompany Profit Transactions – Inventories
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Ending Inventory on Hand
Intercompany profits in ending inventory Eliminate at year end
Working paper entry
Cost of sales (E, -SE) XXX
Inventories (-A) XXXFor the unrealized profit
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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 inventory40%(6,250) = $2,500
Pot's Income from Sot90%(10,000) – 2,500 unrealized profits = $6,500
Noncontrolling interest share10%(10,000) = $1,000
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Entries
Pot's journal entry to record income
Worksheet entries to eliminate intercompany sale and unrealized profits
Sales (-R, -SE) 15,000
Cost of goods sold (-E, +SE) 15,000Cost of goods sold (E, -SE) 2,500
Inventory (-A) 2,500
Investment in Sot (+A) 6,500
Income from Sot (R, +SE) 6,500
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Worksheet – Income Statement
Pot Sot DR CR Consol
Sales $100.0 $50.0 15.0 $135.0
Income from Sot 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
There would be a credit adjustment to Inventory for $2.5 on the balance sheet portion of the worksheet.
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What if?
If the sales had been upstream, by Sot to Pot:Unrealized profits in ending inventory
40%(6,250) = $2,500Pot's Income from Sot
90%(10,000 – 2,500) = $6,750Noncontrolling interest share
10%(10,000 – 2,500) = $750
Upstream profits impact both: Controlling interest share Noncontrolling interest share
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4: RECOGNIZING PROFITS FROM BEGINNING INVENTORIES
Intercompany Profit Transactions – 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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5: IMPACT ON NONCONTROLLING INTEREST
Intercompany Profit Transactions – Inventories
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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 of the intercompany salesDownstream sales
Full impact on parentUpstream 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 acquired 70% of Salt on 1/1/2011 for $420 when Salt's equity consisted of $200 capital stock and $200 retained earnings. Salt's inventory was understated by $50 and building, with a 20-year life, was understated by $100. Any excess is goodwill.
During 2011, Salt sold goods for $700 to Perry at a 20% markup. $240 of these goods were in Perry's ending inventory.
In 2012, Salt sold goods for $900 to Perry at a 25% markup and Perry still had $100 on hand at the end of the year.
2011 2012
Perry Salt Perry Salt
Separate income $1,250 $705 $1,500 $745Dividends $600 $280 $600 $300
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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 UnamortAllocated to: 1/1/11 2011 1/1/12 2012 12/31/12Inventory 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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NCI 30% share$195 ($12)$183
$84
CI 70% share$455 ($28)$427
$196
2011 Income Sharing (Upstream)
Income from Salt
Salt's net income $705 Current amortizations (55)Adjusted income $650 Defer profits in EI (40)Income recognized $610
Subsidiary dividends $280
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Perry's 2011 Equity Entries
Investment in Salt (+A) 420
Cash (-A) 420For acquisition of 70% of SaltCash (+A) 196
Investment in Salt (-A) 196For dividends receivedInvestment in Salt (+A) 427
Income from Salt (R, +SE) 427For share of income
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Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2011 Worksheet Entries (1 of 3)
1. Adjust for errors & omissions - none2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Sales (-R, -SE) 700
Cost of sales (-E, +SE) 700Cost of Sales (E, -SE) 40
Inventory (-A) 40
Income from Salt (-R, -SE) 427
Dividends (+SE) 196Investment in Salt (-A) 231
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2011 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings & dividends
5. Eliminate reciprocal Investment & sub's equity balances
Capital stock (-SE) 200 Retained earnings (-SE) 200Inventory (+A) 50Building (+A) 100Goodwill (+A) 50
Investment in Salt (-A) 420Noncontrolling interest (+SE) 180
Noncontrolling interest share (-SE) 183 Dividends (+SE) 84Noncontrolling interest (+SE) 99
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2011 Entries (3 of 3)
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances – none
Cost of sales (E, -SE) 50
Inventory (-A) 50Depreciation expense (E, -SE) 5
Building (-A) 5
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NCI 30% share$222 ($6)$12
$228
$90
CI 70% share$518 ($14)$28 $532
$210
2012 Income Sharing (Upstream)
Income from Salt
Salt's net income $745 Current amortizations (5)Adjusted income $740 Defer profits in EI (20)Realize profits from BI 40 Income recognized $760 Subsidiary dividends $300
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Perry's 2012 Equity Entries
Cash (+A) 210Investment in Salt (-A) 210
For dividends receivedInvestment in Salt (+A) 532
Income from Salt (R, +SE) 532For share of income
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2012 Worksheet Entries (1 of 3)1. Adjust for errors & omissions - none2. Eliminate intercompany profits and losses
3. Eliminate income & dividends from sub. and bring Investment account to its beginning balance
Income from Salt (-R, -SE) 532 Dividends (+SE) 210Investment in Salt (-A) 322
Sales (-R, -SE) 900 Cost of sales (-E, +SE) 900
Cost of Sales (E, -SE) 20Inventory (-A) 20
Investment in Salt (+A) 28Noncontrolling interest (-SE) 12
Cost of sales (-E, +SE) 40
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2012 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings & dividends
5. Eliminate reciprocal Investment & sub's equity balances
Capital stock (-SE) 200 Retained earnings (-SE) 625Inventory (+A) 0Building (+A) 95Goodwill (+A) 50
Investment in Salt (-A) 679Noncontrolling interest (+SE) 291
Noncontrolling interest share (-SE) 228 Dividends (+SE) 90Noncontrolling interest (+SE) 138
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2012 Entries (3 of 3)
6. Amortize fair value/book value differentials
7. Eliminate other reciprocal balances – none
Depreciation expense (E, -SE) 5Building (-A) 5
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