Mata kuliah : F0074 - Akuntansi Keuangan Lanjutan II
Tahun : 2010
Intercompany Profit Transaction - Inventories
Pertemuan 5-6

Intercompany Profit Transactions – Inventories
1: Intercompany Inventory Profits

Intercompany Transactions
• For consolidated financial statements, ARB No. 51 (as amended by FASB Statement No. 160) states:
– "intercompany balances and transactions shall be eliminated."
• Show income and financial position as if the intercompany transactions had never taken place.

Intercompany Sales of Inventory
• Profits on intercompany sales of inventory
– All 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
• Consider a FIFO inventory system
– Beginning inventories are sold
– Ending inventories are from current period

No Intercompany Profits in Inventories
• During 2009, Pretty sold goods costing $1,000 to its subsidiary,
Simple, at a gross profit of 30%. Simple had none of this inventory on hand at the end of 2009. Worksheet entry for 2009:
1,429 Sales
Cost of sales
Sales = $1,000 / (1-30%) = $1,429
1,429
• All intercompany sales of inventories have been resold to outside parties, so remove the full sales price from both sales and cost of sales.
– Pretty's sales are reduced $1,429.
– Simple's cost of sales are reduced $1,429.
•
The same entry is used if Simple sells to Pretty.

Intercompany Profits Only in Ending
Inventories
• Last year, 2009, Paul 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 2009.
• During 2010, Paul sold additional goods costing $900 to Sal at a gross profit of 40%. Sal has $200 of these goods on hand at 12/31/2010. Worksheet entries for 2010:
Sales
Cost of sales
Sales = $900 / (1-40%) = $1,500
Cost of sales
Inventory
Ending inventory profit = $200 x 40%
1,500
80
1,500
80

Intercompany Profits Beginning and Ending
Inventories
Last year, 2009, Pam sold goods costing $300 to its subsidiary, Sir, at markup of 25%. Sir had $120 of this inventory on hand at the end of 2009.
During 2010, Pam sold additional goods costing $500 to Sir at a 30% markup. Sir has $260 of these goods on hand at 12/31/2010. Worksheet entries for 2010:
650 Sales
Cost of sales
Sales = $500 + 30%($500) = $650
Cost of sales
Inventory
Ending inv. profits = $260 x 30%/130%
Investment in Subsidiary
Cost of sales
Begin. inv. profits = $120 x 25%/125% = $24
60
24
650
60
24

Intercompany Profit Transactions – Inventories
2: Upstream & Downstream Inventory Sales

Upstream and Downstream Sales
Downstream
Sales
Parent
Parent sells to subsidiary
Subsidiary sells to parent
Subsidiary 1 Subsidiary 2 Subsidiary 3
Upstream Sales

Intercompany Inventory Sales
• The worksheet entries for eliminating intercompany profits for downstream sales
XXX Sales
Cost of sales
For the intercompany sales price
Cost of sales
Inventory
For the profits in ending inventory
Investment in Subsidiary
Cost of sales
For the profits in beginning inventory
XX
XX
XXX
XX
XX
For upstream sales, the last entry would also include a debit to noncontrolling interest, splitting the profit to be realized between controlling and noncontrolling interests.

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 profits in ending inventory $60
– IC profit in beginning inventory $24

Income Sharing with Downstream Sales – PARENT Makes Sale
Subsidiary net income
Current amortizations
Adjusted income
Defer profits in EI
Recognize profits in BI
Income recognized
$5,200
(450)
$4,750
(60)
24
$4,714
CI 80% share
$3,800
(60)
24
$3,764 Income from subsidiary
$2,400
Subsidiary dividends $3,000 NCI 20% share
$950
When parent makes the IC sale, the impact of deferring and recognizing profits falls all to the parent.
$600

Income Sharing with Upstream Sales –
SUBSIDIARY Makes Sale
Subsidiary net income
Current amortizations
Adjusted income
$5,200
(450)
$4,750
CI 80% share
$3,800
(48)
19.2
$3,771.2 Income from subsidiary
Defer profits in EI (60)
Recognize profits in
BI 24
Income recognized $4,714
$2,400
NCI 20% share
Subsidiary $3,000 the impact of deferring and recognizing profits is split among controlling and noncontrolling interests.
$950.0
(12.0)
4.8
$942.8
$600

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

Ending Inventory on Hand
• Intercompany profits in ending inventory
– Eliminate at year end
• Working paper entry
Cost of sales
Inventories
For the unrealized profit
XXX
XXX

Parent Accounting
Porter owns 90% of Sorter acquired at book value (no amortizations).
During the current year, Sorter reported $10,000 income. Porter sold goods to Sorter during the year for $15,000 including a profit of
$6,250. Sorter still holds 40% of these goods at the end of the year.
• Unrealized profit in ending inventory
40%(6,250) = $2,500
• Porter's Income from Sorter
90%(10,000) – 2,500 unreal. Profits = $6,500
• Noncontrolling interest share
10%(10,000) = $1,000

Entries
• Porter's journal entry to record income
Investment in Sorter
Income from Sorter
6,500
6,500
• Worksheet entries to eliminate intercompany sale and unrealized profits
15,000 Sales
Cost of sales
Cost of sales
Inventory
2,500
15,000
2,500

Worksheet – Income Statement
Sales
Income from Sorter
Cost of sales
Expenses
Noncontrolling interest share
Controlling interest share
Porter Sorter DR CR Consol
$100.0 $50.0 15.0 $135.0
6.5
(60.0) (35.0)
(15.0) (5.0)
6.5
2.5 15.0
0.0
(82.5)
(20.0)
$31.5 $7.5
1.0 (1.0)
$31.5
There would be a credit adjustment to Inventory for 2.5 on the balance sheet portion of the worksheet.

What if?
If the sales had been upstream, by Sorter to 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
• Upstream profits impact both
– Controlling interest share
– Non-controlling interest share

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

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!

Intercompany Profit Transactions – Inventories
5: Impact on Non-controlling Interest

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 non-controlling interest

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 )

Upstream Example with Amortization
Perry acquired 70% of Salt on 1/1/2009 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.
Separate income
Dividends
2009 2010
Perry Salt Perry Salt
$1,25
0 $705
$1,50
0 $745
$600 $280 $600 $300
During 2009, Salt sold goods costing $700 to Perry at a 20% markup. $240 of these goods were in Perry's ending inventory.
In 2010, Salt sold goods costing $900 to Perry at a 25% markup and Perry still had
$100 on hand at the end of the year.

Analysis and Amortization
Cost of 70% of Salt
Implied value of Salt 420/.70
Book value 200 + 200
Excess
$420
$600
400
$200
Allocated to:
Inventory
Building
Goodwill
Unamort Amort Unamort Amort Unamort
1/1/09 2009
50 (50)
1/1/10
0
2010
0
12/31/10
0
100
50
(5)
0
200 (55)
95
50
145
(5)
0
(5)
90
50
140

2009 Income Sharing (Upstream)
Salt's net income
Current amortizations
Adjusted income
$705
(55)
$650
CI 70% share
$455
($28)
$427 Income from Salt
Defer profits in EI
Income recognized
(40)
$610
$196
Subsidiary dividends $280
NCI 30% share
$195
($12)
$183
$84

Perry's 2009 Equity Entries
420 Investment in Salt
Cash
For acquisition of 70% of Salt
Cash
Investment in Salt
For dividends received
Investment in Salt
Income from Salt
For share of income
196
427
420
196
427

2009 Worksheet Entries
1.
Adjust for errors & omissions none
2.
Eliminate intercompany profits and losses
Sales
Cost of sales
700
700
Cost of Sales
Inventory
40
3.
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
40
427 Income from Salt
Dividends
Investment in Salt
196
231

2009 Entries (2 of 3)
4.
Record noncontrolling interest in sub's earnings & dividends
Noncontrolling interest share
Dividends
Noncontrolling interest
183
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock
Retained earnings
Inventory
Building
Goodwill
Investment in Salt
Noncontrolling interest
200
200
50
100
50
84
99
420
180

2009 Entries (3 of 3)
6. Amortize fair value/book value differentials
Cost of sales
Inventory
Depreciation expense
Building
50
5
7. Eliminate other reciprocal balances – none
50
5

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

Perry's 2010 Equity Entries
210 Cash
Investment in Salt
For dividends received
Investment in Salt
Income from Salt
For share of income
532
210
532

2010 Worksheet Entries
1.
Adjust for errors & omissions none
2.
Eliminate intercompany profits and losses
Sales
Cost of sales
Cost of Sales
Inventory
Investment in Salt
Noncontrolling interest
Cost of sales
Income from Salt
Dividends
Investment in Salt
900
20
28
12
900
20
40
3.
Eliminate income & dividends from sub. and bring Investment account to its beginning balance
532
210
322

2010 Entries (2 of 3)
4.
Record non-controlling interest in sub's earnings & dividends
Non-controlling interest share
Dividends
Noncontrolling interest
228
5.
Eliminate reciprocal Investment & sub's equity balances
Capital stock
Retained earnings
Inventory
Building
Goodwill
Investment in Salt
Non-controlling interest
200
625
0
95
50
90
138
679
291

2010 Entries (3 of 3)
6. Amortize fair value/book value differentials
Depreciation expense
Building
7. Eliminate other reciprocal balances – none
5
5