Intercompany Sales

Inventory
 Intercompany Sales at Cost
• When an intercompany sale includes no profit or loss, the
inventory amounts at the end require no adjustments for
consolidation.
• Even when the intercompany sale include no profit or loss,
however, an eliminating entries is needed to remove the
intercompany sale and the cost of goods sold recorded by the
seller.
 Intercompany Sales at Profit or Loss
• When intercompany sales include profit or losses, the working paper
elimination needed
1. Elimination of the effects in the statement of CI of the
intercompany sale in the period of sale, removing the sales revenue
from the intercompany sale and the related costs of goods sold
recorded by the selling affiliate
2. Elimination from inventory on the Statement of Financial Position
of any profit or loss on the intercompany sale that has not been
confirmed or realized by resale of inventory to outsiders.
 Downstream Sales
• Downstream intercompany sales of merchandise are those from a parent to
its subsidiaries.
• For consolidation purposes, recorded on an intercompany sales are
realized in the period in which inventory is resold to outsiders. Until the
point of resale, all intercompany profit must be deferred. If the
intercompany sales of merchandise are made by the parent or by a wholly
owned subsidiary, there is no effect on any NCI in CI because the selling
affiliate does not have NCI.
 Illustration – First Year
• Assume that Pete Corporation on April 1,2012 sold merchandise to Sake Company
costing P8,000 for P10,000, out of which P4,000 remain unsold by Sake Company
on December 31,2012. Sake Company sold merchandise at 20% mark-up on sale.
Books of Pete Corporation Books of Sake Corporation
Cash 10,000 Inventory 10,000
Sales 10,000 Cash 10,000

Cost of goods sold 8,000 Cash 7,500

Inventory 8,000 Sales 7,500

Cost of goods sold 6,000

Inventory 6,000
 Selling Price Cost Gross Profit
Beginning Inventory - - -
Add: Purchases 10,000 8,000 2,000
Totals 10,000 8,000 2,000
Less: Ending Inventory (4,000) (3,200) (800)
Cost of Goods Sold 6,000 4,800 1,200

Working paper elimination entries:

Sales 10,000
Cost of goods sold 10,000
*to eliminate intercompany sale of inventory

Cost of goods sold 800

Inventory 800
*to eliminate unrealized inventory profit
Computation and Allocation of Consolidated
Comprehensive Income
Pete's CI from own operation (excluding dividend) 50,000
Unrealized intercompany profit in ending inventory (800)
Pete's realized income from outsiders 49,200
Sake's CI from own operations 20,000
Consolidated CI 69,200
Attributable to NCI 4,000
Attributable to parent Shareholders 65,200
 Subsequent Year
• Assume that during the year 2013, Pete sold again merchandise
to Sake for 25,000 at a gross margin of 20%. Of this
merchandise P6,000 remains in the ending inventories of Sake on
December 31,2013.
Books of Pete Corporation Books of Sake Corporation
Cash 25,000 Inventory 25,000
Sales 25,000 Cash 25,000

Cost of goods sold 20,000 Cash 28,750

Inventory 20,000 Sales 28,750

Cost of goods sold 23,000

Inventory 23,000
 Selling Price Cost Gross Profit
Beginning Inventory 4,000 3,200 -
Add: Purchases 25,000 20,000 5,000
Totals 29,000 23,200 5,000
Less: Ending Inventory (6,000) (4,800) (1,200)
Cost of Goods Sold 23,000 18,400 3,800

Working paper elimination entries:

Sales 25,000
Cost of goods sold 25,000
*to eliminate intercompany sale of inventory

Cost of goods sold 1,200

Inventory 1,200
*to eliminate unrealized inventory profit

Retained Earnings, Jan. 1 800

Cost of goods sold 800
Computation and Allocation of Consolidated
Comprehensive Income
Pete's CI from own operation (excluding
dividend) 50,000
Realized intercompany profit in beginning
inventory 800
Unrealized intercompany profit in ending
inventory (1,200)
Pete's realized income from outsiders 49,600
Sake's CI from own operations 20,000
Consolidated CI 69,600
Attributable to NCI 4,000
Attributable to parent Shareholders 65,600
 Upstream Sale
• Upstream intercompany sales are those from subsidiary to the parent
company. When an upstream sale of inventory occurs and the inventory is
resold by the parent to outsiders during the same period, all the parent
entries and the eliminating entries in the consolidated working paper are
identical to those in the downstream case.
• The intercompany profit in an upstream sale is recognized by the subsidiary
and shared between the controlling interest and NCI.
 Illustration
• Assume that Sake Corporation on April 1,2012 sold merchandise to Pete Company
costing P8,000 for P10,000, out of which P4,000 remain unsold by Sake Company on
December 31,2012. Sake Company sold merchandise at 20% mark-up on sale.

Books of Sake Corporation Books of Pete Corporation

Cash 10,000 Inventory 10,000
Sales 10,000 Cash 10,000

Cost of goods sold 8,000 Cash 7,500

Inventory 8,000 Sales 7,500

Cost of goods sold 6,000

Inventory 6,000
 Selling Price Cost Gross Profit
Beginning Inventory - - -
Add: Purchases 10,000 8,000 2,000
Totals 10,000 8,000 2,000
Less: Ending Inventory (4,000) (3,200) (800)
Cost of Goods Sold 6,000 4,800 1,200

Working paper elimination entries:

Sales 10,000
Cost of goods sold 10,000
*to eliminate intercompany sale of inventory

Cost of goods sold 800

Inventory 800
*to eliminate unrealized inventory profit
Computation and Allocation of Consolidated
Comprehensive Income
Pete's realized income from outsiders 50,000
Sake's CI from own operations
Sake's CI 20,000

Unrealized profit in ending inventory (800) 19,200

Consolidated CI 69,200
Attributable to NCI 3,840
Attributable to parent Shareholders 65,360
 Subsequent Year
• Assume that during the year 2013, Sake sold again merchandise to Pete for
25,000 at a gross margin of 20%. Of this merchandise P6,000 remains in
the ending inventories of Sake on December 31,2013.
Books of Sake Corporation Books of Pete Corporation
Cash 25,000 Inventory 25,000
Sales 25,000 Cash 25,000

Cost of goods sold 20,000 Cash 28,750

Inventory 20,000 Sales 28,750

Cost of goods sold 23,000

Inventory 23,000
 Selling Price Cost Gross Profit
Beginning Inventory 4,000 3,200 -
Add: Purchases 25,000 20,000 5,000
Totals 29,000 23,200 5,000
Less: Ending Inventory (6,000) (4,800) (1,200)
Cost of Goods Sold 23,000 18,400 3,800
Working paper elimination entries:
Sales 25,000
Cost of goods sold 25,000
*to eliminate intercompany sale of inventory

Cost of goods sold 1,200

Inventory 1,200
*to eliminate unrealized inventory profit

Retained Earnings, Jan. 1 640

NCI 160
Cost of goods sold 800
Computation and Allocation of Consolidated
Comprehensive Income
Pete's realized income from outsiders 50,000
Sake's CI from own operations
Sake's CI 20,000
Realized Profit in beginning inventory 800

Unrealized profit in ending inventory (1,200) 19,600

Consolidated CI 69,600
Attributable to NCI 3,920
Attributable to parent Shareholders 65,680
APPLICATION
Patti Company holds 80% of the common stock of Shannon, Inc..
In the current year, Patti reports sales of P 10,000,000 and cost of
goods sold of P 7,500,000. For the same period, Shannon has sales
of P 200,000 and cost of goods sold of P 160,000. During the year,
Patti sold merchandise to Shannon for P 60,000 at a price based on
normal markup. At the end of the year, Shannon still possesses 30
percent of this inventory.

1. Compute consolidated sales

2. Compute consolidated cost of goods sold
3. Compute consolidated gross profit
1. 10,140,000
2. 7,604,500
3. 2,535,500

Patti Shannon Dr CR Consolidated

Sales 10,000,000 200,000 60,000 10,140,000

Cost of goods sold 7,500,000 160,000 4,500 60,000 7,604,500

Gross Profit 2,500,000 40,000 2,535,500

Pepper Company acquired 80% of the voting stock of Salt
Company on January 1,2015 for 950,000 when Salt Company’s During 2016, Pepper Company purchased
retained earnings amounted to 150,000. On that date the, the merchandise from Salt Company in the
following assets of Salt Company had book values that were amount of 160,000 at billed price, and at
different from their respective fair values: December 31,2016 one fourth of this
Book Value Fair Market Value merchandise remained unsold. Also during
Land 150,000 200,000 the same year, Salt Company purchased
Building 200,000 325,000 merchandise from Pepper costing 135,000.
Equipment 450,000 400,000 At the end of the year one third of the
merchandise remained unsold by Salt.
On January 1,2015, the building had a remaining useful life of 20
years. Equipment had remaining useful lives of 10 years. During 2017, Pepper company sold
Goodwill, if any, is not to be amortized. merchandise to Salt for 290,000 at billed
price and at December 31, 2017, one-third
Salt Company reported retained earnings of 320,000 on of this merchandise remained unsold. Also,
December 31,2017. Salt Company reported net income of 90,000 during the same year, Salt Company sold to
and declared dividends of 30,000 in 2017. Also, Pepper reported Pepper costing 240,000. At year end, one
net income of 724,000 with a dividends paid of 25,000 and fifth remain unsold by the parent.
retained earnings on December 31,2017 of P3,500,000.
The sales and cost of sales are as follows: Salt Company and Pepper Company shipped
Pepper Salt merchandise at 33 1/3 percent above cost.
Sales 2,500,000 1,200,000
Cost of Sales 1,250,000 875,000
Required:
4. Consolidated Net Income in 2017
5. Profit Attributable to Equity Holders of Parent
6. NCI in CI
7. Consolidated Retained Earnings
8. Consolidated Cost of Sales
On January 1,2014, Papaya Company acquires 80% of the common stock of
Saging Company for 372,000. The common stock of Saging company was On There is no intercompany sales prior to year 2015.
that the following assets and liabilities of Saging Company had book values that Information resulting from intercompany sales, ending
were different from their respective market values: and gross profit rates of Saging to Papaya are
Saging Co. Saging Co. summarized below:
Book Value Fair Value Year Sales Intercompany Intercompany
Inventory 24,000 30,000 at Merchandise of Papaya Profit
cost at December 31
Land 48,000 55,200
2015 60,000 50% of sales 35% above cost
Equipment 180,000 180,000
Accumulated Dep’n (96,000) 2016 75,000 40% of sales 40% based on
Buildings 360,000 114,000 selling price
Accumulated Dep’n (192,000)
Common Stock, P1 par 180,000 In 2015, Papaya sold merchandise that cost 192,000 to Saging
for 240,000. Half of this merchandise remained in Saging’s
APIC 120,000
December 31,2015 inventory. During 2016, Papaya sold
Retained Earnings 97,600 merchandise that cost P300,000 to Saging at 25% above cost.
Twenty percent of this merchandise inventory remained in
On January 1,2014, the equipment and buildings had a remaining life of 8 Saging’s December 31,2016 inventory.
and 4 years, respectively. Inventory is sold in 2015. Goodwill amounted to
1,952 is impaired in year 2015 and 2016. The sales and cost of sales are as follows:
Papaya Saging
Saging Company reported retained earnings of 520,000 on December Sales 3,400,000 1,600,000
31,2016. Saging reported net income of 114,000 and declared dividends of Cost of Sales 2,050,000 1,000,000
48,000 in 2016. Also, Papaya reported net income of 800,500 with a
dividends paid of 30,000 and retained earnings on December 31,2016 of P
2,160,000.
Required:
4. Consolidated Net Income in 2017
5. Profit Attributable to Equity Holders of
Parent
6. NCI in CI
7. Consolidated Retained Earnings
8. Consolidated Cost of Sales
On January 1,2008, Pedro Company purchased an 80% interest in Sally Inc. for 1,000,000. The following
income statement data were prepared for Pedro Company and its subsidiary, Sally, Inc. on December
31,2013.
Pedro Sally
Sales 600,000 300,000
Other Income 40,000 15,000
Cost of Goods Sold 320,000 180,000
Operating Expenses 150,000 32,000

On January 1,2013, Pedro sold merchandise for resale to Sally, Inc. at a mark-up on cost of 25%. Sales
during 2013 were 150,000. The inventory of these goods held by Sally was 15,000 on January 1,2013 and
P18,000 on December 31,2013.

9. What is the consolidated net income attributable to controlling interest to be reported in the consolidated
statement of comprehensive income on December 31,2013?
Total comprehensive income from own operations – Pedro 170,000
Unrealized profit in ending inventor (18,000 x 20%) (3,600)
Realized Profit in beginning inventory (15,000 x 20%) 3,000
Adjusted total comprehensive income 169,400
Total Comprehensive Income – Sally 103,000
Consolidated CI 272,400
NCI in CI (103,000 x 20%) (20,600)
Attributable to controlling interest 251,800