Company P Company S2 P sells inventory Downstream S2 sells inventory Upstream S1 sells inventory Horizontal Company S1 Consolidated Entity Profit loss that has not been realized through
Trang 2Learning Objectives
• Describe the financial reporting objectives for intercompany sales of inventory
• Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements
• Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position
• Distinguish between upstream and downstream sales of inventory
• Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders
• Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods
• Discuss the treatment of intercompany profit earned prior to the parent-subsidiary affiliation
2
Trang 3Upstream and Downstream Sales of Inventory
3
LO 4 Upstream and downstream sales.
Company P
Company S2
P sells inventory Downstream S2 sells inventory Upstream
S1 sells inventory Horizontal
Company S1
Consolidated Entity
Profit (loss) that has not been realized through subsequent sales to third parties is defined as unrealized intercompany
profit (loss) and must be eliminated in the preparation of consolidated financial statements.
Trang 4LO 1 Financial reporting objectives for intercompany sales.
Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances
• The financial reporting objectives are:
– Consolidated sales include only sales with parties outside the affiliated group.
– Consolidated cost of sales includes only the cost to the affiliated group of goods that have
been sold to parties outside the affiliated group.
– Consolidated inventory on the balance sheet is recorded at its cost to the affiliated group.
4
Objective is to eliminate the effects of intercompany sales as if they had never occurred
Trang 5Intercompany Sales of Merchandise
Determination of Consolidated Sales,
Cost of Sales, and Inventory Balances
• E6-7: (Downstream Sales-variation) Perkins Company owns 85% of Sheraton Company
Perkins Company sells merchandise to Sheraton Company at 20% above cost During 2014 and
2015, such sales amounted to $450,000 and $486,000, respectively At the end of each year,
Sheraton Company had sold all of inventory purchased from Perkins to third parties
Required: Prepare the workpaper entries necessary to eliminate the effects of the intercompany
sales for 2014
5
LO 6 Consolidated workpapers for downstream sales.
Downstream Sales
Trang 6Intercompany Sales of Merchandise
6
LO 6 Consolidated workpapers for downstream sales.
(COGS) (Inventory)
Intercompany Sales $ 450,000 $ 450,000 $ Intercompany COGS 375,000 375,000 - Gross profit $ 75,000 $ 75,000 $ -
-1. The “Total” column represents the Sales and COGS booked by Perkins to record the sale to Sheraton The Sales amount also
represents the cost of the inventory recorded by Sheraton
2. The “Resold” column represents intercompany inventory that was resold to third parties Portions resold are recorded in COGS.
3. “On Hand” represents intercompany inventory still on hand in the affiliated group
Downstream Sales
Trang 7E6-7: Summary of 2014 Intercompany Sales
Intercompany Sales of Merchandise
7
LO 6 Consolidated workpapers for downstream sales.
Sales 450,000
Purchases (Cost of Sales) 450,000
To eliminate intercompany sales
Prepare the workpaper entry to eliminate intercompany sales for 2014.
Downstream Sales
Trang 8Intercompany Sales of Merchandise
Determination of Consolidated Sales,
Cost of Sales, and Inventory Balances
• E6-7: (Downstream Sales-variation) Perkins Company owns 85% of Sheraton Company
Perkins Company sells merchandise to Sheraton Company at 20% above cost During 2014 and
2015, such sales amounted to $450,000 and $486,000, respectively At the end of each year,
Sheraton Company had in its inventory one-third of the amount of goods purchased from Perkins during that year.
Required: Prepare the workpaper entries necessary to eliminate the effects of the intercompany
sales for 2014 and 2015
8
LO 6 Consolidated workpapers for downstream sales.
Downstream Sales
Trang 9Intercompany Sales of Merchandise
9
LO 6 Consolidated workpapers for downstream sales.
Sales 450,000
Ending Inventory – Income Statement (Cost of Sales) 25,000
To eliminate intercompany sales and defer (eliminate) the unrealized gross profit in ending inventory until it is sold to outsiders
Prepare the workpaper entry to eliminate intercompany sales for 2014.
Downstream Sales
Trang 10Intercompany Sales of Merchandise
1
1
2
3
1 Original Sales and Cost of Sales recorded by Perkins (parent) is reversed.
2 Cost of Sales overstated by Sheraton on resale of goods to third parties.
3 Inventory on hand is overstated on Sheraton’s books by $25,000 unrealized profit
Alternate View
Trang 11Intercompany Sales of Merchandise
11
LO 6 Consolidated workpapers for downstream sales.
Downstream Sales
2014 Unrealized Profit in Inventory
Cost or Partial Equity Method *
To realize (recognize) the gross profit in beginning inventory deferred in the prior period
* If the complete equity method is used, the debit is to the Investment account.
Trang 12Intercompany Sales of Merchandise
12
LO 6 Consolidated workpapers for downstream sales.
Downstream Sales
2015 Intercompany Sales
Sales 486,000
To eliminate intercompany sales and defer (eliminate) unrealized profit in ending inventory
Trang 13Intercompany Sales of Merchandise
Determination of Amount of Intercompany Profit
• Gross profit may be stated either as a percentage of sales or as a percentage of cost When
stated as a percentage of cost, it is referred to as “markup”
Inventory Pricing Adjustments
• The amount of intercompany profit subject to elimination should be reduced to the extent that the related goods have been written down by the purchasing affiliate
13
LO 2 Determining the amount of intercompany profit.
Trang 14Intercompany Sales of Merchandise
Determination of Proportion of Intercompany Profit to Be Eliminated
• “The amount of intercompany profit or loss to be
eliminated is not affected by the existence of a minority [noncontrolling] interest
• The complete elimination of the intercompany profit or loss is consistent with the underlying
assumption that consolidated statements represent the financial position and operating results of
a single business enterprise.” [FASB ASC paragraph 810-10-45-18]
14
LO 3 Eliminating 100% of intercompany profit.
Trang 15Cost Method: Consolidated Statements Workpaper—Upstream Sales
Determination of the Noncontrolling Interest in Combined Income—Upstream or Horizontal Sales
• Modification of the calculation of the noncontrolling interest is applicable only when the
subsidiary is the selling affiliate (upstream or horizontal sales)
• Where the parent company is the selling affiliate (downstream sale), no adjustment is necessary
in the calculation of the noncontrolling interest in consolidated net income
15
LO 5 Noncontrolling interest (NCI) for upstream sales.
Trang 16LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Cost Method: Consolidated Workpaper
• P6-7: Paque Corporation owns 90% of the common stock of Segal
Company The stock was purchased for $810,000 on January 1, 2012, when Segal Company’s retained earnings were $150,000
• The January 1, 2016, inventory of Paque Corporation includes $45,000 of profit recorded by
Segal Company on 2015 sales During 2016, Segal Company made intercompany sales of
$300,000 with a markup of 20% of selling price The ending inventory of Paque Corporation
includes goods purchased in 2016 from Segal Company for $75,000
• Required: Prepare the worksheet entries and the consolidated statements workpaper for the year ended December 31, 2016
16 Upstream Sales
Trang 17Investment in Segal 27,000
$ 27,000
To establish reciprocity/convert to equity as of 1/1/2016
P6-7: Worksheet entries for Dec 31, 2016.
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Cost Method: Consolidated Workpaper
17 Upstream Sales
1.
Trang 182016 Intercompany Sales
2 Sales 300,000
Purchases (Cost of Sales) 300,000
3 Ending Inventory (Cost of Sales) 15,000
Inventory (Balance Sheet) 15,000
To eliminate intercompany sales and eliminate (defer) unrealized profit in ending inventory
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
P6-7: Worksheet entries for Dec 31, 2016.
Cost Method: Consolidated Workpaper
18 Upstream Sales
Trang 192015 Unrealized Profit in Inventory
To realize (recognize) the gross profit in inventory deferred in the prior period and reduce CI and NCI for their share of unrealized profit at beginning of year
Cost Method: Consolidated Workpaper
19
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
P6-7: Worksheet entries for Dec 31, 2016.
Upstream Sales
Trang 20Dividend Income ($60,000 x 90%) 54,000
P6-7: Worksheet entries for Dec 31, 2016.
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
To eliminate intercompany dividends
To eliminate investment account and create NCI account
Cost Method: Consolidated Workpaper
20
Upstream Sales
5.
6.
Trang 21Eliminations P6-7
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
(2) (5)
(4) (2)
(1) (4)
(6)
(5)
NCI in Consolidated Income = 10% × ($71,250 + $45,000 – $15,000) = $10,125
Cost Method: Consolidated Workpaper
21 Upstream Sales
(3)
Trang 22LO 6 Consolidated workpapers for upstream Sales- Cost Method.
(3) (6)
(1)
(6)
(6) (4)
P6-7
Cost Method: Consolidated Workpaper
22 Upstream Sales
Trang 23Cost Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings
Consolidated Net Income
• The parent company’s income from its independent operations that has been realized in
transactions with third parties
– plus (minus) subsidiary income (loss) that has been realized in transactions with third
parties
– plus or minus adjustments for the period relating to the depreciation, amortization, and
impairment of differences between implied and book values
23
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Trang 24P6-7: Prepare a calculation of Paque’s share of Segal’s income
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Cost Method: Consolidated Net Income
24
Less: amortization of difference between
Less: unrealized profit on 2016 sales to Paque
Plus: profit on prior year's sales to Paque realized
(15,000)
Upstream Sales
Trang 25LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Cost Method: Consolidated Net Income
25
Less: subsidiary dividend income
Paque's net income from its independent operations 49,500
Plus: profit on prior year's sales to Segal realized
Paque's income from independent operations that
has been realized in transactions with third parties 49,500
(54,000)
P6-7: Prepare a calculation of CI in Consolidated Income.
Upstream Sales
Trang 26Cost Method—Analysis of Consolidated Net Income and Consolidated Retained Earnings
Consolidated Retained Earnings
• The parent’s cost basis retained earnings that has been realized in transactions with third parties
– plus (minus) the parent’s share of the increase (decrease) in subsidiary retained earnings that has been realized in transactions with third parties from the date of acquisition to the current date
– plus (minus) the cumulative effect of adjustments to date relating to the amortization,
depreciation, and impairment of differences between implied and book values
26
LO 6 Consolidated workpapers for upstream Sales- Cost Method.
Trang 27Consolidated Statements Workpaper —Partial Equity Method
Trang 28Partial Equity Method:
Workpaper
P6-13: (Note: This is the same problem as Problem 6-7, but assuming the use of the partial equity method.)
• Paque Corporation owns 90% of the common stock of Segal Company The stock was
purchased for $810,000 on January 1, 2012, when Segal Company’s retained earnings were
$150,000
• The January 1, 2016, inventory of Paque Corporation includes $45,000 of profit recorded by
Segal Company on 2015 sales During 2016, Segal Company made intercompany sales of
$300,000 with a markup of 20% of selling price The ending inventory of Paque Corporation
includes goods purchased in 2016 from Segal Company for $75,000 Paque Corporation uses the partial equity method to record its investment in Segal Company
28 Upstream Sales
LO 6 Consolidated workpapers – partial equity method.
Trang 29Equity in Subsidiary Income 64,125
Investment in Segal Company 10,125
Dividends Declared ($60,000 x 90%)
54,000
P6-13: Worksheet entries for Dec 31, 2016.
To reverse the effect of parent entries for subsidiary dividends and income
1.
Partial Equity Method:
Workpaper
29 Upstream Sales
LO 6 Consolidated workpapers – partial equity method.
Trang 302016 Intercompany Sales
2 Sales 300,000
Purchases (Cost of Sales) 300,000
3 End Inventory (Cost of Sales) 15,000
Inventory (Balance Sheet) 15,000
To eliminate intercompany sales and defer (eliminate) unrealized profit in ending inventory
P6-13 : Worksheet entries for Dec 31, 2016.
Partial Equity Method:
Workpaper
30 Upstream Sales
LO 6 Consolidated workpapers – partial equity method.
Trang 312015 Unrealized Profit in Inventory
To realize (recognize) the gross profit in inventory deferred in the prior period and to reduce CI and NCI for their share of unrealized profit
at beginning of year
Partial Equity Method:
Workpaper
31
LO 6 Consolidated workpapers – partial equity method.
Trang 32Beg Retained Earnings - Segal 180,000
LO 6 Consolidated workpapers – partial equity method.
P6-13: Worksheet entries for Dec 31, 2016.
Upstream Sales
Trang 33(2) (1)
(4) (2)
(4) (5)
(1)
NCI in Consolidated Income = 10% × ($71,250 + $45,000 – $15,000) = $10,125
Partial Equity Method:
Trang 34(3) (5)
(5)
(5) (4)
Trang 35Partial Equity Method—Analysis of Consolidated Net Income
Consolidated Net Income
• The parent’s income from its independent operations that has been realized in transactions with third parties
– plus (minus) subsidiary income (loss) that has been realized in transactions with third
parties
– plus or minus adjustments for the period relating to the depreciation, amortization, and
impairment of differences between implied and book values
35 Same as Cost Method
LO 6 Consolidated workpapers – partial equity method.
Trang 36Consolidated Retained Earnings
• When the parent uses the partial equity method, the parent’s share of subsidiary income since acquisition is already included in the parent’s reported retained earnings
• Consequently, consolidated retained earnings is calculated as the parent’s recorded partial
equity basis retained earnings that has been realized in transactions with third parties plus or
minus the cumulative effect of the adjustments to date relating to the depreciation, amortization, and impairment of differences between implied and book values
36
LO 6 Consolidated workpapers – partial equity method.
Partial Equity Method—Analysis of Consolidated Net Income
Partial Equity Method—Analysis of Consolidated Net Income
Trang 37Consolidated Retained Earnings
37
Partial Equity
Unrealized profit on upstream sales ($15,000 x 90%)
(13,500)
P6-13: Calculate consolidated retained earnings on Dec 31, 2016.
LO 6 Consolidated workpapers – partial equity method.