Chapter 5

Intercompany
Profit
Transactions –
Inventories
‫مع امالتا لربح ب ينا لشركات‬
‫ ا لمخزون‬- ‫ا لشقيقة‬
 Intercompany Profits – Inventories: Objectives
‫ ا ألهداف‬:‫ ا لمخزون‬- ‫ا ألرباح ب ينا لشركاتا لشقيقة‬
1. Understand the impact of intercompany profit
in inventories on preparing consolidation work
papers.
‫فهم تأثير الربح بين الشركات في المخزونات على إعداد أوراق عمل التوحيد‬.
2. Apply the concepts of upstream versus
downstream inventory transfers.
‫تطبيق مفاهيم عمليات نقل المخزون األولية مقابل عمليات نقل المخزون‬.
3. Defer unrealized inventory profits remaining in
the ending inventory.
‫تأجيل أرباح المخزون غير المحققة المتبقية في المخزون الختامي‬.
4. Recognize realized, previously deferred,
inventory profits in the beginning inventory.
‫التعرف على أرباح المخزون المحققة والمؤجلة مسبقًا في المخزون األول‬.
© Pearson Education Limited 2015 5-2
Objectives (cont.)

5. Adjust noncontrolling interest amounts in the

presence of intercompany inventory profits.
‫ضبط مبالغ الفائدة غير المسيطرة في ظل وجود أرباح مخزون بين الشركات‬
‫الشقيقة‬.

© Pearson Education Limited 2015 5-3

 Intercompany Profit Transactions – Inventories

1: INTERCOMPANY
INVENTORY PROFITS
‫أرباح ا لمخزونب ينا لشركاتا لشقيقة‬

© Pearson Education Limited 2015 5-4

Intercompany Transactions
‫ا لمع امالتب ينا لشركاتا لشقيقة‬

For consolidated financial statements

‫للقوائم المالية الموحدة‬
– “intercompany balances and transactions shall be
eliminated.” [FASB ASC 810-10-45-1]
‫يتم حذف األرصدة والمعامالت بين الشركات‬
Show income and financial position as if the
intercompany transactions had never taken
place.
‫أظهر الدخل والمركز المالي كما لو أن المعامالت بين الشركات الشقيقة لم‬
‫تحدث أب ًدا‬.

© Pearson Education Limited 2015 5-5

Intercompany Sales of Inventory ‫مبيع اتا لمخزونب ينا لشركاتا لشقيقة‬
Profits on intercompany sales of inventory
‫أرباح مبيعات المخزون بين الشركات الشقيقة‬
– Recognized if goods have been resold to outsiders
‫معترف به إذا تم إعادة بيع البضائع إلى الغرباء‬
– Deferred if the goods are still held in inventory
‫ذا كانت البضائع ال تزال محتفظ بها في المخزون‬O‫مؤجل إ‬
Previously deferred profits in beginning inventory are recognized
in the period the goods are sold. Assuming FIFO
‫ بافتراض‬.‫لمؤجلة سابقًا في بداية المخزون في الفترة التي يتم فيها بيع البضائع‬O‫يتم االعتراف باألرباح ا‬
FIFO
– Beginning inventories are sold
‫يتم بيع مخزونات البداية‬
– Ending inventories are from current purchases
‫قوائم الجرد النهائية من المشتريات الحالية‬

© Pearson Education Limited 2015 5-6

 No Intercompany Profits in Inventories ‫ال ت وجد أرباح‬
‫ب ينا لشركاتا لشقيقة ف يا لمخزونات‬
During 2012, Pet sold goods costing $1,000 to its subsidiary, Sim,
at a gross profit of 30%. Sim had none of this inventory on hand
at the end of 2011. The worksheet entry for 2011:
Sim ، ‫ دوالر أمريكي إلى شركتها الفرعية‬1000 ‫سلعا تبلغ تكلفتها‬
ً Pet ‫ باعت‬، 2012 ‫خالل عام‬
‫ إدخال ورقة‬.2011 ‫ أي من هذا المخزون في نهاية عام‬Sim ‫ لم يكن لدى‬.٪30 ‫ بإجمالي ربح‬،
:2011 ‫العمل لعام‬
Sales (-R, -SE) 1,429
Cost of sales (-E, +SE) 1,429
Eliminate intercompany sales = $1,000 / (1-30%) = $1,429
All intercompany sales of inventories have been resold to outside
parties, so remove the full sales price from both sales and cost of
sales.
Pet's sales are reduced $1,429.
Sim's cost of sales are reduced $1,429.
The same entry is used if Sim sells to Pet.
‫ لذلك‬، ‫تمت إعادة بيع جميع المبيعات بين الشركات الشقيقة للمخزون إلى أطراف خارجية‬
Pet ‫تم تخفيض مبيعات‬.‫قم بإزالة سعر البيع الكامل من كل من المبيعات وتكلفة المبيعات‬
‫يتم استخدام نفس‬.‫دوالرا‬
ً 1429 ‫ بمقدار‬Sim ‫تم تخفيض تكلفة مبيعات‬.‫دوالرا‬
ً 1429 ‫بمقدار‬
.Pet‫ يبيع ل‬Sim ‫اإلدخال إذا كان‬

© Pearson Education Limited 2015 5-7

 Intercompany Profits Only in Ending Inventories
‫ا ألرباح ب ينا لشركاتا لشقيقة ف قط ف ين هاية ا لمخزون‬
Last year, 2011, Pal 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 2011.
During 2012, Pal sold additional goods costing $900
to Sal at a gross profit of 40%. Sal has $200 of these
goods on hand at 12/31/2012. Worksheet entries
for 2012:
‫ دوالر أمريكي‬500 ‫سلعا تبلغ تكلفتها‬
ً Pal ‫ باعت شركة‬، 2011 ، ‫في العام الماضي‬
‫ لم يكن لدى سال أي من هذا‬.٪25 ‫ بإجمالي ربح‬، ‫ سال‬، ‫إلى الشركة التابعة لها‬
‫سلعا‬
ً Pal ‫ باع‬، 2012 ‫خالل عام‬.2011 ‫المخزون في متناول اليد في نهاية عام‬
‫ دوالر من‬200 ‫ يمتلك سال‬.٪40 ‫ بإجمالي ربح‬Sal ‫ دوالر لشركة‬900 ‫إضافية بقيمة‬
:2012 ‫ إدخاالت ورقة العمل لعام‬.12/31/2012 ‫هذه البضائع في متناول اليد بتاريخ‬
Sales (-R, -SE) 1,500
Cost of sales (-E, +SE) 1,500
Eliminate intercompany sales = $900 / (1-40%) = $1,500
Cost of sales (E, -SE) 80
Inventory (-A) 80
Defer profit in ending inventory = $200 x 40%

© Pearson Education Limited 2015 5-8

 Intercompany Profits Beginning and Ending Inventories
‫ب داية ونهاية ق وائم ا لجرد ا ألرباح ب ينا لشركات‬
Last year, 2011, 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 2011.
During 2012, Pam sold additional goods costing $500 to Sir
at a 30% mark-up. Sir has $260 of these goods on hand at
12/31/2012. Worksheet entries for 2012:
‫ بزيادات‬، Sir ، ‫ دوالر إلى فرعها‬300 ‫ سلعًا تبلغ تكلفتها‬Pam ‫ باعت‬، 2011 ، ‫في العام الماضي‬
‫خالل‬.2011 ‫ دوال ًرا من هذا المخزون في متناول اليد في نهاية عام‬sir120 ‫ كان لدى‬.٪25 ‫قدرها‬
Sales
260 ‫(السيد‬-R, -SE)
‫ لدى‬.٪ 650 ‫ باع‬، 2012 ‫عام‬
30 ‫بنسبة‬sir ‫ دوالر إلى‬500 ‫سلعًا إضافية تبلغ تكلفتها‬pam
Cost ‫لعام‬
:2012 of sales (-E,‫إدخاالت‬
‫مل‬O‫ورقة الع‬ +SE) .31/12/2012 ‫من هذه البضائع في متناول اليد في‬ 650
‫دوال ًرا‬
Eliminate intercompany sales = $500 + 30%($500) = $650
Cost of sales (E, -SE) 60
Inventory (-A) 60
Defer profits in ending inventory = $260 x 30%/130%
Investment in Subsidiary (+A) 24
Cost of sales (-E, +SE) 24
Realize profits from beginning inventory = $120 x 25%/125% = $24

© Pearson Education Limited 2015 5-9

 Intercompany Profit Transactions – Inventories
‫ المخزون‬- ‫معامالت األرباح بين الشركات الشقيقة‬

2: UPSTREAM &
DOWNSTREAM INVENTORY
SALES
2:‫مبيع اتجرد ا لمنبع وا لمصب‬

© Pearson Education Limited 2015 5-10

 Upstream and Downstream Sales
‫مبيع اتا لمنبع وا لمصب‬

Downstream
Sales
Parent

Parent sells to Subsidiary sells

subsidiary to parent
Subsidiary 1 Subsidiary 2 Subsidiary 3

Upstream Sales

© Pearson Education Limited 2015 5-11

 Intercompany Inventory Sales ‫مبيع اتا لجرد ب ينا لشركاتا لشقيقة‬
The worksheet entries for eliminating intercompany profits for
downstream sales
‫إدخاالت ورقة العمل للتخلص من األرباح بين الشركات الشقيقة للمبيعات النهائية‬
Sales (-R, -SE) XXX
Cost of sales (-E, +SE) XXX
For the intercompany sales price
Cost of sales (E, -SE) XX
Inventory (-A) XX
For the profits in ending inventory
Investment in Subsidiary (+A) XX
Cost of sales (-E, +SE) XX
For the profits in beginning inventory

For upstream sales, the last entry would include a debit to

noncontrolling interest, sharing the realized profit between
controlling and noncontrolling interests.
‫ وتقاسم األرباح‬، ‫ سيتضمن اإلدخال األخير خص ًما لحصة غير مسيطرة‬، ‫بالنسبة للمبيعات األولية‬
‫لمسيطرة‬O‫المحققة بين الحصص المسيطرة وغير ا‬.

© Pearson Education Limited 2015 5-12

Data for Example‫ب ياناتعلىس بيل ا لمثا ل‬
For the year ended 12/31/2011:
– Subsidiary income is $5,200
– Subsidiary dividends are $3,000
– Current amortization of acquisition price is $450
‫أرباح األسهم الفرعية‬5200 $ ‫الدخل الفرعي هو‬:31/12/2011 ‫للسنة المنتهية في‬
‫ دوالرًا‬450 ‫ دوالراالستهالك الحالي لسعر الشراء هو‬3000
Intercompany (IC) sales information:
– IC sales during 2011 were $650
– IC profit in ending inventory $60
– IC profit in beginning inventory $24
‫( معلومات المبيعات بين الشركات الشقيقة‬IC):‫ بلغت مبيعات‬IC 2011 ‫خالل عام‬
‫ دوالرًاربح‬650 IC ‫ دوالرًاربح‬60 ‫ في إنهاء المخزون‬IC 24 ‫في بداية المخزون‬
‫دوالرًا‬
© Pearson Education Limited 2015 5-13
 Income Sharing with Downstream Sales – PARENT Makes
Sale
‫ وليا ألمر ي جعل ا لبيع‬-‫ت قاسم ا لدخل مع مبيع اتا لمصب‬

Subsidiary net income $5,200 CI 80% share

Current amortizations (450) $3,800
Adjusted income $4,750
(60)
   
24
Defer profits in EI (60)
$3,764 Income from
Recognize profits in BI 24
subsidiary
Income  
recognized $4,714 $2,400 NCI 20% share
   
Subsidiary dividends $3,000 $950
 
 
When parent makes the IC sale, the impact of deferring
 
and recognizing profits falls all to the parent.
$600
‫ عندما يقوم أحد الوالدين ببيع‬IC ، ‫فإن تأثير تأجيل األرباح واالعتراف بها يقع على عاتق‬
‫الوالدين‬.

© Pearson Education Limited 2015 5-14

Income Sharing with Upstream Sales – SUBSIDIARY Makes
Sale
‫ ش ركة ف رعية ت قوم ب ا لبيع‬- ‫ت قاسم ا لدخل مع مبيع اتا لمنبع‬

CI 80% share

Subsidiary net income $5,200 $3,800

Current amortizations (450) (48)
Adjusted income $4,750 19.2
    $3,771.2 Income from
Defer profits in EI (60)   subsidiary
Recognize profits in BI 24
$2,400
Income recognized $4,714 NCI 20% share
   
Subsidiary dividends $3,000 $950.0
(12.0)
4.8 
When subsidiary makes the IC sale, the impact  $942.8
of deferring and recognizing profits is split
among controlling and noncontrolling interests.
‫ يتم تقسيم تأثير تأجيل األرباح واالعتراف‬، IC ‫عندما تقوم الشركة التابعة ببيع‬ $600
.‫بها بين الحصص المسيطرة وغير المسيطرة‬

© Pearson Education Limited 2015 5-15

 Intercompany Profit Transactions – Inventories
‫ المخزون‬- ‫معامالت األرباح بين الشركات الشقيقة‬

3: UNREALIZED PROFITS IN
ENDING INVENTORIES
3: ‫أرباح غير محققة ف ين هاية ا لمخزون‬

© Pearson Education Limited 2015 5-16

 Ending Inventory on Hand
‫إنهاء ا لجرد ف يمتناول ا ليد‬
Intercompany profits in ending inventory
– Eliminate at year end
Working paper entry
‫أرباح الشركات الشقيقة في إنهاء المخزون‬
‫ألغ نهاية العام‬
ِ
‫إدخال ورقة العمل‬

Cost of sales (E, -SE) XXX

Inventories (-A) XXX

For the unrealized profit

© Pearson Education Limited 2015 5-17

Parent Accounting
Pot owns 90% of Sot acquired at book value
(no amortizations). During the current year,
Sot reported $10,000 income. Pot sold goods to
Sot during the year for $15,000 including a
profit of $6,250. Sot still holds 40% of these
goods at the end of the year.
Unrealized profit in ending inventory
40%(6,250) = $2,500
Pot's Income from Sot
90%(10,000) – 2,500 unrealized profits = $6,500
Noncontrolling interest share
10%(10,000) = $1,000

© Pearson Education Limited 2015 5-18

Entries
Pot's journal entry to record income (net of
unrealized profit).

Investment in Sot (+A) 6,500

Income from Sot (R, +SE) 6,500

Worksheet entries to eliminate intercompany sale
and unrealized profits

Sales (-R, -SE) 15,000

Cost of goods sold (-E, +SE) 15,000
Cost of goods sold (E, -SE) 2,500
Inventory (-A) 2,500

© Pearson Education Limited 2015 5-19

Worksheet – Income Statement
  Pot Sot DR CR Consol
$100.
Sales 0 $50.0 15.0   $135.0
Income from Sot 6.5   6.5   0.0
15.
Cost of sales (60.0) (35.0) 2.5 0 (82.5)
Expenses (15.0) (5.0)     (20.0)
Noncontrolling interest
share     1.0   (1.0)
Controlling interest
share $31.5 $10.0     $31.5

There would be a credit adjustment to Inventory for $2.5 on

the balance sheet portion of the worksheet.

© Pearson Education Limited 2015 5-20

What if?
If the sales had been upstream, by Sot to Pot:
Unrealized profits in ending inventory
40%(6,250) = $2,500
Pot's Income from Sot
90%(10,000 – 2,500) = $6,750
Noncontrolling interest share
10%(10,000 – 2,500) = $750

Upstream profits impact both:

– Controlling interest share
– Noncontrolling interest share

© Pearson Education Limited 2015 5-21

 Intercompany Profit Transactions – Inventories

4: RECOGNIZING PROFITS
FROM BEGINNING
INVENTORIES

© Pearson Education Limited 2015 5-22

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!
© Pearson Education Limited 2015 5-23
 Intercompany Profit Transactions – Inventories

5: IMPACT ON
NONCONTROLLING
INTEREST

© Pearson Education Limited 2015 5-24

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

© Pearson Education Limited 2015 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 Limited 2015 5-26

Upstream Example with
Amortization
Perry acquired 70% of Salt on 1/1/2011 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.
2011 2012
Perry Salt Perry Salt
Separate income $1,250 $705 $1,500 $745
Dividends $600 $280 $600 $300

During 2011, Salt sold goods for $700 to Perry at a 20%

markup. $240 of these goods were in Perry's ending inventory.
In 2012, Salt sold goods for $900 to Perry at a 25% markup and
Perry still had $100 on hand at the end of the year.

© Pearson Education Limited 2015 5-27

Analysis and Amortization

Cost of 70% of Salt $420

Implied value of Salt 420/.70 $600
Book value 200 + 200 400
Excess $200

  Unamort Amort Unamort Amort Unamort

Allocated to: 1/1/11 2011 1/1/12 2012 12/31/12
Inventory 50 (50) 0 0 0
Building 100 (5) 95 (5) 90
Goodwill 50 0 50 0 50
  200 (55) 145 (5) 140

© Pearson Education Limited 2015 5-28

2011 Income Sharing (Upstream)

Salt's net income $705

CI 70% share
Current
amortizations (55) $455
Adjusted income $650 ($28)
    $427 Income from Salt
Defer profits in EI (40)  
Income recognized $610 $196
 
  NCI 30% share
Subsidiary dividends $280 $195
($12)
$183
 
$84

© Pearson Education Limited 2015 5-29

Perry's 2011 Equity Entries

Investment in Salt (+A) 420

Cash (-A) 420
For acquisition of 70% of Salt
Cash (+A) 196
Investment in Salt (-A) 196
For dividends received
Investment in Salt (+A) 427
Income from Salt (R, +SE) 427
For share of income

© Pearson Education Limited 2015 5-30

2011 Worksheet Entries (1 of 3)

1. Adjust for errors & omissions - none

2. Eliminate intercompany profits and losses

Sales (-R, -SE) 700

Cost of sales (-E, +SE) 700
Cost of Sales (E, -SE) 40
Inventory (-A) 40

3. Eliminate income & dividends from sub. and bring Investment

account to its beginning balance

Income from Salt (-R, -SE) 427

Dividends (+SE) 196
Investment in Salt (-A) 231

© Pearson Education Limited 2015 5-31

2011 Entries (2 of 3)

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

Noncontrolling interest share (-SE) 183

Dividends (+SE) 84
Noncontrolling interest (+SE) 99
5. Eliminate reciprocal Investment & sub's equity balances

Capital stock (-SE) 200

Retained earnings (-SE) 200
Inventory (+A) 50
Building (+A) 100
Goodwill (+A) 50
Investment in Salt (-A) 420
Noncontrolling interest (+SE) 180

© Pearson Education Limited 2015 5-32

2011 Entries (3 of 3)

6. Amortize fair value/book value differentials

Cost of sales (E, -SE) 50

Inventory (-A) 50
Depreciation expense (E, -SE) 5
Building (-A) 5

7. Eliminate other reciprocal balances – none

© Pearson Education Limited 2015 5-33

2012 Income Sharing (Upstream)
   
Salt's net income $745
Current CI 70% share
amortizations (5) $518
Adjusted income $740 ($14)
    $28
Defer profits in EI (20) $532 Income from
Realize profits from   Salt
BI 40
$210
Income recognized $760
    NCI 30% share
Subsidiary dividends $300 $222
($6)
$12
$228
 
$90
© Pearson Education Limited 2015 5-34
Perry's 2012 Equity Entries

Cash (+A) 210

Investment in Salt (-A) 210
For dividends received
Investment in Salt (+A) 532
Income from Salt (R, +SE) 532
For share of income

© Pearson Education Limited 2015 5-35

2012 Worksheet Entries (1 of 3)
1. Adjust for errors & omissions - none
2. Eliminate intercompany profits and losses
Sales (-R, -SE) 900
Cost of sales (-E, +SE) 900
Cost of Sales (E, -SE) 20
Inventory (-A) 20
Investment in Salt (+A) 28
Noncontrolling interest (-SE) 12
Cost of sales (-E, +SE) 40
3. Eliminate income & dividends from sub. and bring
Investment account to its beginning balance
Income from Salt (-R, -SE) 532
Dividends (+SE) 210
Investment in Salt (-A) 322

© Pearson Education Limited 2015 5-36

2012 Entries (2 of 3)

4. Record noncontrolling interest in sub's earnings &

dividends
Noncontrolling interest share (-SE) 228
Dividends (+SE) 90
Noncontrolling interest (+SE) 138

5. Eliminate reciprocal Investment & sub's equity balances

Capital stock (-SE) 200

Retained earnings (-SE) 625
Inventory (+A) 0
Building (+A) 95
Goodwill (+A) 50
Investment in Salt (-A) 679
Noncontrolling interest (+SE) 291

© Pearson Education Limited 2015 5-37

2012 Entries (3 of 3)

6. Amortize fair value/book value differentials

Depreciation expense (E, -SE) 5

Building (-A) 5

7. Eliminate other reciprocal balances – none

© Pearson Education Limited 2015 5-38