Advanced accounting 10th by a beams athony ch05

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 Hal 5-1 Intercompany Profits – Inventories: Objectives Understand the impact of intercompany profit for inventories on preparation of consolidation working papers Apply the concepts of upstream versus downstream inventory transfers Defer unrealized inventory profits remaining in ending inventory of either the parent or subsidiary © Pearson Education, Inc publishing as Prentice Hal 5-2 Objectives (cont.) Recognize realized, previously deferred inventory profits in the beginning inventory of either the parent or subsidiary Adjust the calculations of noncontrolling interest amounts in the presence of intercompany inventory profits © Pearson Education, Inc publishing as Prentice Hal 5-3 Intercompany Profit Transactions – Inventories 1: Intercompany Inventory Profits © Pearson Education, Inc publishing as Prentice Hal 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 Hal 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 Hal 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: • 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 Sales Cost of sales Sales = $1,000 / (1-30%) = $1,429 © Pearson Education, Inc publishing as Prentice Hal 1,429 1,429 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 Hal 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 Begin inv profits = $120 x 25%/125% = $24 © Pearson Education, Inc publishing as Prentice Hal 24 24 5-9 Intercompany Profit Transactions – Inventories 2: Upstream & Downstream Inventory Sales © Pearson Education, Inc publishing as Prentice Hal 5-10 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 Hal 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 Hal 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 2009 2010 Perry Salt Perry Salt income $1,250 $705 to$1,500 DuringSeparate 2009, Salt sold goods costing $700 Perry at a$745 20% Dividends $600 $600 markup $240 of these goods were $280 in Perry's ending$300 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 Hal 5-27 Analysis and Amortization Cost of 70% of Salt $420 Implied value of Salt 420/.70 $600 Book value 200 + 200 Excess   Allocated to: Inventory Building Goodwill   400 $200 Unamort Amort 1/1/09 2009 50 (50) 100 (5) 50 200 (55) Unamort Amort 1/1/10 2010 0 95 (5) 50 145 (5) © Pearson Education, Inc publishing as Prentice Hal Unamort 12/31/10 90 50 140 5-28 2009 Income Sharing (Upstream) Salt's net income Current amortizations Adjusted income   Defer profits in EI Income recognized   $705 (55) $650 CI 70% share $455 ($28) Income from Salt $427   (40) $610   $196   Subsidiary dividends NCI 30% share $195 ($12) $183 $280   $84 © Pearson Education, Inc publishing as Prentice Hal 5-29 Perry's 2009 Equity Entries Investment in Salt 420 Cash 420 For acquisition of 70% of Salt Cash 196 Investment in Salt 196 For dividends received Investment in Salt Income from Salt 427 427 For share of income © Pearson Education, Inc publishing as Prentice Hal 5-30 2009 Worksheet Entries Adjust for errors & omissions - none Eliminate intercompany profits and losses Sales 700 Cost of sales Cost of Sales 700 40 Inventory 40 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 Hal 5-31 2009 Entries (2 of 3) Record noncontrolling interest in sub's earnings & dividends Noncontrolling interest share Dividends Noncontrolling interest 183 84 99 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 Hal 200 200 50 100 50 420 180 5-32 2009 Entries (3 of 3) Amortize fair value/book value differentials Cost of sales 50 Inventory 7.Depreciation Eliminate otherexpense reciprocal balances – none Building © Pearson Education, Inc publishing as Prentice Hal 50 5 5-33 2010 Income Sharing (Upstream)     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 CI 70% share $518 ($14) $28 Income from Salt $532   $210 NCI 30% share $222 ($6) $12 $228   © Pearson Education, Inc publishing as Prentice Hal $90 5-34 Perry's 2010 Equity Entries Cash 210 Investment in Salt 210 For dividends received Investment in Salt Income from Salt 532 532 For share of income © Pearson Education, Inc publishing as Prentice Hal 5-35 2010 Worksheet Entries Adjust for errors & omissions - none 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 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 Hal 532 210 322 5-36 2010 Entries (2 of 3) Record noncontrolling interest in sub's earnings & dividends Noncontrolling interest share Dividends Noncontrolling interest 228 90 138 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 Hal 200 625 95 50 679 291 5-37 2010 Entries (3 of 3) Amortize fair value/book value differentials Depreciation expense Eliminate other reciprocal balances – none Building © Pearson Education, Inc publishing as Prentice Hal 5 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 Hal 5-39 ... publishing as Prentice Hal 5-4 Intercompany Transactions • For consolidated financial statements, ARB No 51 (as amended by FASB Statement No 160) states: – "intercompany balances and transactions shall... Prentice Hal 5-10 Upstream and Downstream Sales Downstream Sales Parent Subsidiary sells to parent Parent sells to subsidiary Subsidiary Subsidiary Subsidiary Upstream Sales © Pearson Education,... Perry at a 25% markup and Perry still had $100 on hand at the end of the year © Pearson Education, Inc publishing as Prentice Hal 5-27 Analysis and Amortization Cost of 70% of Salt $420 Implied value