CCFC 513 Lecture Notes - Lecture 6: Retained Earnings, Gross Margin, Book Value
25 Jun 2018
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CHAPTER 6: INTERCOMPANY INVENTORY AND LAND PROFITS
Scenario 1: P (parent company) sells assets to S (subsidiary)
- P records sales
Accounts receivable
XXX
Sales
XXX
- S will record cost of sales / purchase
Cost of sales
XXX
Purchases
XXX
When we prepare consolidated financial statements, we need to do elimination of ALL
intercompany transactions (i.e. sales)
The following journal entry must be made to eliminate the intercompany transaction:
Sales
XXX
Cost of goods sold
XXX
- If the intercompany transaction, sales will be overstated and cost of goods sold will be
overstated, while net income will be correct
Scenario 2: P gives a loan to S
- P recorded in accounts receivable while S recorded a long-term debt
- The sum of the 2 amounts will have no effect on the net assets
- Elimination journal entry:
Accounts receivable
XXX
Long-term debt
XXX
6.1 Intercompany Profits in Assets
6.1.1 Intercompany Inventory Profits
Downstream = Parent sells to subsidiary
Upstream = Subsidiary sells to parent
When there is intercompany transactions, we need to identify whether it is downstream or
upstream transaction
Scenario: P sells inventory worth $10,000 to S
- P recorded a gross margin of 30% which is equivalent to $3,000. This means that the
inventory was originally valued at carrying amount of $7,000 on the books of P
- P recorded sales in its income statement while S recorded cost of goods sold in its
income statement
- The intercompany transaction (effect of sales) need to be eliminated:
Document Summary
Scenario 1: p (parent company) sells assets to s (subsidiary) S will record cost of sales / purchase. When we prepare consolidated financial statements, we need to do elimination of all intercompany transactions (i. e. sales) The following journal entry must be made to eliminate the intercompany transaction: If the intercompany transaction, sales will be overstated and cost of goods sold will be overstated, while net income will be correct. Scenario 2: p gives a loan to s. P recorded in accounts receivable while s recorded a long-term debt. The sum of the 2 amounts will have no effect on the net assets. When there is intercompany transactions, we need to identify whether it is downstream or upstream transaction. Scenario: p sells inventory worth ,000 to s. P recorded a gross margin of 30% which is equivalent to ,000. This means that the inventory was originally valued at carrying amount of ,000 on the books of p.
