Advanced Accounting

Thirteenth Edition

Chapter 5
Intercompany Profit
Transactions –
Inventories
ACT 302 Z
Genap 2020/2021
HSD

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Intercompany Profits – Inventories:
Objectives
5.1 Understand the impact of intercompany inventory
profit on consolidation work papers.
5.2 Apply the concepts of upstream versus downstream
inventory transfers.
5.3 Defer unrealized inventory profits remaining in the
ending inventory.
5.4 Recognize realized, previously deferred inventory
profits in the beginning inventory.
5.5 Adjust noncontrolling interest amounts in the
presence of intercompany inventory profits.

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Upstream and Downstream Sales

Downstream
Sales

Parent sells to Parent Subsidiary sells

subsidiary to parent

Subsidiary Subsidiary Subsidiary

1 2 3
Upstream Sales

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Agenda:
Gain
DownStream
Loss
Inventories
Gain
UpStream
Loss

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5.1: Intercompany Inventory Profits
Intercompany Profit Transactions – Inventories

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Intercompany Transactions
PSAK 65

Eliminasi transaksi Persediaan:

– Penjualan dan harga pokok penjualan
– Keuntungan dan kerugian hasil dari transaksi intra
kelompok usaha
– Jika barang belum terjual maka laba yang belum direalisasi
harus dikurangkan dari nilai inventory dan mempengaruhi
laba yang telah diakui.

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Intercompany Sales of Inventory
Profits on intercompany sales of inventory
– 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 in the period the goods are sold.
Assuming FIFO:
– Beginning inventories are sold
– Ending inventories are from current purchases

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 From outsider vendor
Pop and Son - 2016 Price: $40.000

Pop Corporation formed a

subsidiary, Son Corporation, in
2016 to retail a special line of Pop Cost: $40.000
Price: $48.000
Pop’s merchandise.
All Son’s purchases are made
from Pop Corporation at 20 100%
percent above Pop’s cost.
During 2016, Pop sold Cost: $48.000
merchandise that cost $40,000 Son Price: $60.000
to Son for $48,000, and Son
sold all the merchandise to its
customers for $60,000. 100% Sold to outsider

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 Pop and Son – journal entries 2016
Pop’s Books Dr Cr
Inventory 40,000
Account Payable 40,000
To record purchases on occount from other entities

Account receivable - Son 48,000

Sales 48,000
To record intercompany sales to Son

Cost of Sales 40,000

Inventory 40,000
To record cost of sales to Son

Son’s Books Dr Cr
Inventory 48,000
Account Payable - Pop 48,000
To record intercompany purchases from Pop

Account receivable 60,000

Sales 60,000
To record sales to customers outside the consolidated entity

Cost of Sales 48,000

Inventory 48,000
To record cost of sales to customers

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 Pop and Son – FS 2016
Pop
Pop 100%
100% Dr Cr Consol
Son
Son
Sales 48,000
48,000 60,000
60,000 48,000 60,000
Cost of Sales 40,000
40,000 48,000
48,000 48,000 40,000
Gross Profit 8,000
8,000 12,000
12,000 20,000

Elimination for Consolidation Dr Cr

Sales 48,000
Cost of Sales 48,000
To eliminate intercompany sales and cost of sales

Accounts payable - Pop 48,000

Accounts receivable - Son 48,000
To eliminate intercompany payable and receivable (if any)

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 From outsider vendor
Pop and Son - 2017
Price: $60.000
During 2017 Pop sold
merchandise that cost $60,000
to Son for $72,000, Pop Cost: $60.000
Price: $72.000

and Son sold all but $12,000 of Laba: $12,000

this merchandise to its Unrealised 1/6
100% = $2,000
customers for $75,000.

Son Cost: $72.000

31/12/17
Remaining inventory
$12,000→12,000/72,000 = 1/6 partially Sold
Unrealised
Cost: $60,000

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 Pop and Son – journal entries 2017
Pop’s Books Dr Cr
Inventory 60,000
Account Payable 60,000
To record purchases on occount from other entities

Account receivable - Son 72,000

Sales 72,000
To record intercompany sales to Son

Cost of Sales 60,000

Inventory 60,000
To record cost of sales to Son

Son’s Books Dr Cr
Inventory 72,000
Account Payable - Pop 72,000
To record intercompany purchases from Pop

Account receivable 75,000

Sales 75,000
To record sales to customers outside the consolidated entity

Cost of Sales 60,000

Inventory 60,000
To record cost of sales to customers

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 Pop and Son – FS 2017
Pop
Pop 100%
100% Dr Cr Consol
Son
Son
Sales 72,000
72,000 75,000
75,000 72,000 75,000
Cost of Sales 60,000
60,000 60,000
60,000 2,000 72,000 50,000
Gross Profit 12,000
12,000 15,000
15,000 25,000
Inventory 12,000
12,000 2,000 10,000

Elimination for Consolidation Dr Cr

Sales 72,000
Cost of Sales 72,000
To eliminate intercompany sales and cost of sales

Cost of Sales 2,000

Inventory 2,000
To eliminate intercompany profit from cost of sales and inventory

Accounts payable - Pop 72,000

Accounts receivable - Son 72,000
To eliminate intercompany payable and receivable

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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!

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 From outsider vendor
Pop and Son - 2018
Price: $80.000
During 2018, Pop Corporation
sold merchandise that cost
$80,000 to Son for $96,000, Pop Cost: $80.000
Price: $96.000

and Son sold 75 percent of the Laba: $16,000

merchandise for $90,000. Unrealised 1/4
100% = $4,000

Son also sold the items in the Inventory from 2017

$12,000
beginning inventory with a
transfer price of $12,000 to its
Son Cost: $96.000
customers for $15,000.

Partially Sold
31/12/18 Cost: $72,000
Remaining inventory With selling price: $90,000
¼x$96,000=$24,000 Sold 2017 inventory
Cost: $12,000
With selling price: $15,000
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 Pop and Son – journal entries 2018
Pop’s Books Dr Cr
Inventory 80,000
Account Payable 80,000
To record purchases on occount from other entities

Account receivable - Son 96,000

Sales 96,000
To record intercompany sales to Son

Cost of Sales 80,000

Inventory 80,000
To record cost of sales to Son

Son’s Books Dr Cr
Inventory 96,000
Account Payable - Pop 96,000
To record intercompany purchases from Pop

Account receivable 105,000

Sales 75,000
To record sales of $90,000 and $15,000 to customers outside entities

Cost of Sales 84,000

Inventory 84,000
To record cost of sales to customers ($72,000 and $12,000)

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 Pop and Son – FS 2018
Pop
Pop 100%
100% Dr Cr Consol
Son
Son
Sales
Sales 96,000
96,000 105,000
105,000 96,000 105,000
Cost
Cost of
of Sales
Sales 80,000
80,000 84,000
84,000 4,000 96,000 70,000
2,000
Gross Profit 16,000 21,000
Gross Profit 16,000 21,000 35,000
Inventory 24,000
Inventory 24,000 4,000 20,000
Investment in Son xxx
Investment in Son xxx 2,000
Elimination for Consolidation Dr Cr
Sales 96,000
Cost of Sales 96,000
To eliminate intercompany sales and cost of sales

Investment in Son 2,000

Cost of Sales 2,000
To eliminate intercompany profit from cost of sales and inventory

Cost of Sales 4,000

Inventory 4,000
To eliminate intercompany profit from cost of sales and inventory

Accounts payable - Pop 96,000

Accounts receivable - Son 96,000
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To eliminate intercompany payable and receivable
5.2: Upstream & Downstream
Inventory Sales
Intercompany Profit Transactions – Inventories

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Upstream and Downstream Sales

Downstream
Sales

Parent sells to Parent Subsidiary sells

subsidiary to parent

Subsidiary Subsidiary Subsidiary

1 2 3
Upstream Sales

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Intercompany Inventory Sales
The worksheet entries for eliminating intercompany profits
for downstream sales
Sales (-R, -SE) XXX blank
Cost of sales (-E, +SE) blank XXX
For the intercompany sales price

Cost of sales (E, -SE) XX blank

Inventory (-A) blank XX
For the profits in ending inventory

Investment in Subsidiary (+A) XX blank

Cost of sales (-E, +SE) blank XX
For the profits in beginning inventory blank blank

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Intercompany Inventory Sales
The worksheet entries for eliminating intercompany profits
for upstream sales
Sales (-R, -SE) XXX blank
Cost of sales (-E, +SE) blank XXX
For the intercompany sales price

Cost of sales (E, -SE) XX blank

Inventory (-A) blank XX
For the profits in ending inventory

Investment in Subsidiary (+A) XX blank

Noncontrolling interest XX
Cost of sales (-E, +SE) blank XX
For the profits in beginning inventory blank blank

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Direction of Sale and NCI
The impact of unrealized profits in ending inventory
and realizing profits in beginning inventory depends
on the direction of the intercompany sales.
Downstream sales
– Full impact on parent
Upstream sales
– Share impact between parent and
noncontrolling interest

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 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)

NI: Net Income; CI: Controlling interest; NCI: Noncontrolling interest; EI: Ending inventory; BI: Beginning inventory
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5.3: INTERCOMPANY PROFITS
FROM DOWNSTREAM SALES
Intercompany Profit Transactions – Inventories

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PAM and SUN Pam
Sun Corporation is a 90 percent–owned subsidiary of Pam
Corporation, acquired for $94,500 cash on July 1, 2016, when Sun’s
net assets consisted of $100,000 capital stock and $5,000 retained
earnings. NCI 90%
The cost of Pam’s 90 percent interest in Sun was equal to book value 10%
and fair value of the interest acquired ($105,000x90%), and
accordingly, no allocation to identifiable and unidentifiable assets was
necessary.
Sun
Pam sells inventory items to Sun on a regular basis, and the
intercompany transaction data for 2019 are as follows:

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2019 Worksheet Entries (1 of 3)
1. Adjust for errors & omissions – none

2. Eliminate intercompany profits and losses

Sales (-R, -SE) 20 blank
Cost of sales (-E, +SE) blank 20
For the intercompany sales price

Cost of sales (E, -SE) 2,5 blank

Inventory (-A) blank 2,5
For the profits in ending inventory

Investment in Subsidiary (+A) 2 Blank

Cost of sales (-E, +SE) blank 2
For the profits in beginning inventory blank blank

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 27

FS Pam and Sun 31 Dec 2019 ($000)

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 28

Income & Dividend Calculations

2019 Pam Sun - Downstream: blank Pam’s 90% NCI 10%
share share
Sun's net income $30k $27k $3k
2018 Inventory profit recognized in 2019 $2k $2k
2019 Inventory profit deferred at year end -$2,5k -$2,5k
Income $26,5k $3k
Blank Blank Blank Blank
Dividends $10k $9k $1k
Blank blank

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2019 Worksheet Entries (2 of 3)
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance

Income from Sun (-R, -SE) 26,5 blank

Dividends (+SE) blank 9
Investment in Sun (-A) blank 17.5

4. Record noncontrolling interest in sub's earnings & dividends

Noncontrolling interest share (-SE) 3 blank
Dividends (+SE) Blank 1
Noncontrolling interest (+SE) blank 2

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2019 Worksheet Entries (3 of 3)
5. Eliminate reciprocal Investment & sub's equity balances
Capital stock (-SE) 100 blank
Retained earnings (-SE) 45 blank
Investment in Sun (-A) blank 130.5
Noncontrolling interest (+SE) blank 14.5

6. Amortize fair value/book value differentials - none

7. Eliminate other reciprocal balances

Accounts payable (-L) 10 blank
Accounts receivable (-A) blank 10

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5.4: INTERCOMPANY PROFITS
FROM UPSTREAM SALES
Intercompany Profit Transactions – Inventories

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PAM and SUN Pam
Sun Corporation is a 90 percent–owned subsidiary of Pam
Corporation, acquired for $94,500 cash on July 1, 2016, when Sun’s
net assets consisted of $100,000 capital stock and $5,000 retained
earnings. NCI 90%
The cost of Pam’s 90 percent interest in Sun was equal to book value 10%
and fair value of the interest acquired ($105,000x90%), and
accordingly, no allocation to identifiable and unidentifiable assets was
necessary.
Sun
Sun sells inventory items to Pam on a regular basis, and the
intercompany transaction data for 2019 are as follows:

Pam

Pam

Pam

Pam Sun

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2019 Worksheet Entries (1 of 3)
1. Adjust for errors & omissions – none

2. Eliminate intercompany profits and losses

Sales (-R, -SE) 20 blank
Cost of sales (-E, +SE) blank 20
For the intercompany sales price

Cost of sales (E, -SE) 2,5 blank

Inventory (-A) blank 2,5
For the profits in ending inventory

Investment in Subsidiary (+A) 1,8 blank

Noncontrolling interest 0,2
Cost of sales (-E, +SE) Blank 2
For the profits in beginning inventory blank blank

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 34

Income & Dividend Calculations

2019 Pam Sun - Upstream: Pam’s 90%
blank NCI 10%
share share
Sun's net income $30,000 $27,000 $3,000
2018 Inventory profit recognized in 2019 $2,000 $1,800 $200
2019 Inventory profit deferred at year end -$2,500 -$2,250 -$250
Income $26,550 $2,950
Blank Blank Blank Blank
Dividends $10,000 $9,000 $1,000
Blank blank

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2019 Worksheet Entries (2 of 3)
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance

Income from Sun (-R, -SE) 26,55 blank

Dividends (+SE) blank 9
Investment in Sun (-A) blank 17.55

4. Record noncontrolling interest in sub's earnings & dividends

Noncontrolling interest share (-SE) 2,95 blank
Dividends (+SE) Blank 1
Noncontrolling interest (+SE) blank 1,95

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2019 Worksheet Entries (3 of 3)
5. Eliminate reciprocal Investment & sub's equity balances
Capital stock (-SE) 100 blank
Retained earnings (-SE) 45 blank
Investment in Sun (-A) blank 130.5
Noncontrolling interest (+SE) blank 14.5

6. Amortize fair value/book value differentials - none

7. Eliminate other reciprocal balances

Accounts payable (-L) 10 blank
Accounts receivable (-A) blank 10

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Copyright

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