Beams10e Ch05

advertisement
Chapter 5: Intercompany Profit
Transactions – Inventories
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
© Pearson Education, Inc. publishing as Prentice Hall
5-1
Intercompany Profits –
Inventories: Objectives
1. Understand the impact of intercompany profit
for inventories on preparation of consolidation
working papers.
2. Apply the concepts of upstream versus
downstream inventory transfers.
3. Defer unrealized inventory profits remaining
in ending inventory of either the parent or
subsidiary.
© Pearson Education, Inc. publishing as Prentice Hall
5-2
Objectives (cont.)
4. Recognize realized, previously deferred
inventory profits in the beginning inventory of
either the parent or subsidiary.
5. Adjust the calculations of noncontrolling
interest amounts in the presence of
intercompany inventory profits.
© Pearson Education, Inc. publishing as Prentice Hall
5-3
Intercompany Profit Transactions – Inventories
1: Intercompany Inventory Profits
© Pearson Education, Inc. publishing as Prentice Hall
5-4
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.
© Pearson Education, Inc. publishing as Prentice Hall
5-5
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
© Pearson Education, Inc. publishing as Prentice Hall
5-6
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:
Sales
Cost of sales
Sales = $1,000 / (1-30%) = $1,429
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.
© Pearson Education, Inc. publishing as Prentice Hall
5-7
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%
© Pearson Education, Inc. publishing as Prentice Hall
1,500
1,500
80
80
5-8
Intercompany Profits Beginning
and Ending Inventories
Last year, 2009, 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 2009.
During 2010, Pam sold additional goods costing $500 to Sir
at a 30% mark-up. Sir has $260 of these goods on hand
at 12/31/2010. Worksheet entries for 2010:
Sales
650
Cost of sales
650
Sales = $500 + 30%($500) = $650
Cost of sales
Inventory
60
60
Ending inv. profits = $260 x 30%/130%
Investment in Subsidiary
Cost of sales
24
24
Begin. inv. profits = $120 x 25%/125% = $24
© Pearson Education, Inc. publishing as Prentice Hall
5-9
Intercompany Profit Transactions – Inventories
2: Upstream & Downstream
Inventory Sales
© Pearson Education, Inc. publishing as Prentice Hall
5-10
Upstream and Downstream Sales
Downstream
Sales
Parent
Subsidiary sells
to parent
Parent sells to
subsidiary
Subsidiary 1
Subsidiary 2
Subsidiary 3
Upstream Sales
© Pearson Education, Inc. publishing as Prentice Hall
5-11
Intercompany Inventory Sales
• The worksheet entries for eliminating
intercompany profits for downstream sales
Sales
Cost of sales
XXX
XXX
For the intercompany sales price
Cost of sales
Inventory
XX
XX
For the profits in ending inventory
Investment in Subsidiary
Cost of sales
XX
XX
For the profits in beginning inventory
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.
© Pearson Education, Inc. publishing as Prentice Hall
5-12
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
© Pearson Education, Inc. publishing as Prentice Hall
5-13
Income Sharing with Downstream
Sales – PARENT Makes Sale
Subsidiary net income
Current amortizations
Adjusted income
Defer profits in EI
Recognize profits in BI
$5,200
(450)
$4,750
(60)
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.
© Pearson Education, Inc. publishing as Prentice Hall
CI 80% share
$3,800
(60)
24
Income from subsidiary
$3,764
$2,400
NCI 20% share
$950
$600
5-14
Income Sharing with Upstream
Sales – SUBSIDIARY Makes Sale
Subsidiary net income
Current amortizations
Adjusted income
$5,200
(450)
$4,750
Defer profits in EI
Recognize profits in BI
Income recognized
(60)
24
$4,714
CI 80% share
$3,800
(48)
19.2
Income from subsidiary
$3,771.2
$2,400
NCI 20% share
Subsidiary dividends
$3,000
When subsidiary makes the IC sale,
the impact of deferring and
recognizing profits is split among
controlling and noncontrolling
interests.
© Pearson Education, Inc. publishing as Prentice Hall
$950.0
(12.0)
4.8
$942.8
$600
5-15
Intercompany Profit Transactions – Inventories
3: Unrealized Profits in Ending
Inventories
© Pearson Education, Inc. publishing as Prentice Hall
5-16
Ending Inventory on Hand
• Intercompany profits in ending inventory
– Eliminate at year end
• Working paper entry
Cost of sales
XXX
Inventories
XXX
For the unrealized profit
© Pearson Education, Inc. publishing as Prentice Hall
5-17
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
© Pearson Education, Inc. publishing as Prentice Hall
5-18
Entries
• Porter's journal entry to record income
Investment in Sorter
6,500
Income from Sorter
6,500
• Worksheet entries to eliminate intercompany
sale and unrealized profits
Sales
Cost of sales
Cost of sales
Inventory
© Pearson Education, Inc. publishing as Prentice Hall
15,000
15,000
2,500
2,500
5-19
Worksheet – Income Statement
Porter Sorter
Sales
Income from Sorter
$100.0
$50.0
6.5
Cost of sales
(60.0)
(35.0)
Expenses
(15.0)
(5.0)
Noncontrolling interest share
Controlling interest share
DR
$7.5
Consol
15.0
$135.0
6.5
0.0
2.5 15.0
(82.5)
(20.0)
1.0
$31.5
CR
(1.0)
$31.5
There would be a credit adjustment to Inventory for 2.5 on the
balance sheet portion of the worksheet.
© Pearson Education, Inc. publishing as Prentice Hall
5-20
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
– Noncontrolling interest share
© Pearson Education, Inc. publishing as Prentice Hall
5-21
Intercompany Profit Transactions – Inventories
4: Recognizing Profits from
Beginning Inventories
© Pearson Education, Inc. publishing as Prentice Hall
5-22
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!
© Pearson Education, Inc. publishing as Prentice Hall
5-23
Intercompany Profit Transactions – Inventories
5: Impact on Noncontrolling Interest
© Pearson Education, Inc. publishing as Prentice Hall
5-24
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
noncontrolling interest
© Pearson Education, Inc. publishing as Prentice Hall
5-25
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)
© Pearson Education, Inc. publishing as Prentice Hall
5-26
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
$1,250 $705 $1,500 $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.
© Pearson Education, Inc. publishing as Prentice Hall
5-27
Analysis and Amortization
Cost of 70% of Salt
$420
Implied value of Salt 420/.70
$600
Book value 200 + 200
400
Excess
Allocated to:
Inventory
Building
Goodwill
$200
Unamort Amort
1/1/09
2009
50
(50)
100
(5)
50
0
200
(55)
© Pearson Education, Inc. publishing as Prentice Hall
Unamort Amort
1/1/10
2010
0
0
95
(5)
50
0
145
(5)
Unamort
12/31/10
0
90
50
140
5-28
2009 Income Sharing (Upstream)
Salt's net income
Current amortizations
Adjusted income
$705
(55)
$650
Defer profits in EI
Income recognized
(40)
$610
Subsidiary dividends
$280
CI 70% share
$455
($28)
Income from Salt
$427
$196
NCI 30% share
$195
($12)
$183
$84
© Pearson Education, Inc. publishing as Prentice Hall
5-29
Perry's 2009 Equity Entries
Investment in Salt
Cash
For acquisition of 70% of Salt
420
Cash
Investment in Salt
For dividends received
196
Investment in Salt
Income from Salt
For share of income
427
© Pearson Education, Inc. publishing as Prentice Hall
420
196
427
5-30
2009 Worksheet Entries
1. Adjust for errors & omissions - none
2. Eliminate intercompany profits and losses
Sales
700
Cost of sales
700
Cost of Sales
40
Inventory
40
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Salt
427
Dividends
196
Investment in Salt
231
© Pearson Education, Inc. publishing as Prentice Hall
5-31
2009 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share
Dividends
Noncontrolling interest
183
84
99
5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock
Retained earnings
Inventory
Building
Goodwill
Investment in Salt
Noncontrolling interest
© Pearson Education, Inc. publishing as Prentice Hall
200
200
50
100
50
420
180
5-32
2009 Entries (3 of 3)
6. Amortize fair value/book value differentials
Cost of sales
Inventory
Depreciation expense
Building
50
50
5
5
7. Eliminate other reciprocal balances – none
© Pearson Education, Inc. publishing as Prentice Hall
5-33
2010 Income Sharing (Upstream)
Salt's net income
Current amortizations
Adjusted income
$745
(5)
$740
Defer profits in EI
Realize profits from BI
Income recognized
(20)
40
$760
Subsidiary dividends
$300
CI 70% share
$518
($14)
$28
Income from Salt
$532
$210
NCI 30% share
$222
($6)
$12
$228
$90
© Pearson Education, Inc. publishing as Prentice Hall
5-34
Perry's 2010 Equity Entries
Cash
Investment in Salt
For dividends received
210
Investment in Salt
Income from Salt
For share of income
532
© Pearson Education, Inc. publishing as Prentice Hall
210
532
5-35
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
900
900
20
20
28
12
40
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Salt
Dividends
Investment in Salt
© Pearson Education, Inc. publishing as Prentice Hall
532
210
322
5-36
2010 Entries (2 of 3)
4. Record noncontrolling interest in sub's earnings &
dividends
Noncontrolling interest share
Dividends
Noncontrolling interest
228
90
138
5. Eliminate reciprocal Investment & sub's equity
balances
Capital stock
Retained earnings
Inventory
Building
Goodwill
Investment in Salt
Noncontrolling interest
© Pearson Education, Inc. publishing as Prentice Hall
200
625
0
95
50
679
291
5-37
2010 Entries (3 of 3)
6. Amortize fair value/book value differentials
Depreciation expense
Building
5
5
7. Eliminate other reciprocal balances – none
© Pearson Education, Inc. publishing as Prentice Hall
5-38
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
Copyright © 2009 Pearson Education, Inc.
Publishing as Prentice Hall
© Pearson Education, Inc. publishing as Prentice Hall
5-39
Download
Related flashcards
Create Flashcards