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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 1,429 Cost of sales 1,429
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:
Intercompany Profits Beginning and Ending InventoriesLast 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 60 Inventory 60
Ending inv. profits = $260 x 30%/130%
Investment in Subsidiary 24
Cost of sales 24Begin. inv. profits = $120 x 25%/125% = $24
Intercompany Inventory Sales• The worksheet entries for eliminating intercompany profits for downstream sales
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.
Sales XXX Cost of sales XXX
For the intercompany sales price
Cost of sales XX Inventory XX
For the profits in ending inventory
Investment in Subsidiary XX
Cost of sales XXFor the profits in beginning inventory
Income Sharing with Upstream Sales – SUBSIDIARY Makes Sale
Subsidiary net income $5,200 Current amortizations (450)Adjusted income $4,750 Defer profits in EI (60)Recognize profits in BI 24 Income recognized $4,714 Subsidiary dividends $3,000
CI 80% share$3,800
(48)19.2
$3,771.2
$2,400 NCI 20% share
$950.0(12.0)4.8
$942.8
$600
When subsidiary makes the IC sale, the impact of deferring and recognizing profits is split among controlling and noncontrolling interests.
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 inventory40%(6,250) = $2,500
• Porter's Income from Sorter90%(10,000) – 2,500 unreal. Profits = $6,500
Downstream sales:Income from sub = CI%(Sub's NI) – Profits in EI + Profits in BINoncontrolling 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 AmortizationPerry 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.
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.
2009 2010
Perry Salt Perry SaltSeparate income $1,250 $705 $1,500 $745Dividends $600 $280 $600 $300
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