Chap 5.docx

Chapter 5 Intercompany Profit Transactions—Inventory 

Intercompany transaction: a transaction that occurs between two units of the same entity.

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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

Income Sharing with Downstream Sales – PARENT Makes Sale

Income Sharing with Upstream Sales – SUBSIDIARY Makes Sale

Summary of Journal Entries for Downstream Sales (PS) a. Sales xxx Cost of goods sold xxx To eliminate intercompany sales and related cost of goods sold amounts. b. Investment in S xxx Cost of goods sold xxx To adjust COGS and beginning investment balance for unrealized profits in the beginning inventory. c. Cost of goods sold xxx Inventory xxx To eliminate unrealized profits in the ending inventory and to increase the consolidated COGS to the consolidated entity.

Summary of Journal Entries for Upstream Sales (SP) a. Sales xxx Cost of goods sold xxx To eliminate reciprocal sales and cost of goods sold amounts. b. Investment in S Noncontrolling interest Cost of goods sold

xxx xxx xxx

To adjust COGS and beginning investment balance for unrealized profits in the beginning inventory. c. Cost of goods sold xxx Inventory xxx To eliminate unrealized profits in the ending inventory and to increase COGS.