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Inter company Entries
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11 Intercompany Transactions - Heading
Chapter 4 Intercompany Transactions
Affiliated Cos do business with each other E.g., S sells merchandise to P
Books of P & S fully reflect transactionsB k h ll f th l j l t i
2 Parent & Subsidiary Shown As 1 Company in Consolidation Financial Statements
Books have all of the regular journal entries E.g., books have:
S has A/R from P P has A/P to S
In Consolidation P & S are shown as 1 Co. E.g., Must eliminate intercompany accounts (A/R & A/P)E.g., Must eliminate intercompany accounts (A/R & A/P)
Because one Co doesnt not owe $ to itself
These WS entries same regardless of accounting method Cost, Simple Equity or Sophisticated Equity Methods
3 Intercompany Sales of Merchandise - Heading
Intercompany Sales of Merchandise
4 Intercompany Sales of Merchandise E.g. - #1
Assume P sells inventory to S Inv orig cost $1,000 Inv sold by P to S for $1,200 Inv sold by S for $1,500 to 3rd partyy , p y
W/O eliminations Total Sales & Total COGS too high
S P TotalSales $1,500 $1,200 $2,700
L COGS 1200 1000 2200Less: COGS 1200 1000 2200
Gross Profit $300 $200 $500
25 Intercompany Sales of Merchandise E.g. - #2
Consolidation shows P & S as 1 Co Need to eliminate intercompany sale
Get rid of $1,200 transfer priceGet rid of $1 200 COGS based on intercompany sale Get rid of $1,200 COGS based on intercompany sale
If you do this:
Sales $1,500 ($1500 sale to 3rd party)
Less: COGS 1000 ($1000 original cost to Parent)Less: COGS 1000 ($1000 original cost to Parent)
Gross Profit $500
This is done in IS entry IS stands for Intercompany Sale
6 Worksheet Entry Intracompany Sale of Merchandise E.g. - #3
IS D. Sales Revenue (1st Seller) $1,200IS C. Cost of Goods Sold (2nd Seller) $1,200
7 IA Entry
If intercompany sale is credit sale: Must eliminate A/R & A/P
Called Intercompany Accounts
Reporting as if P & S are 1Co Reporting as if P & S are 1Co You dont owe $ to yourself
Use End of Year Balance of A/R&A/P
IA D. Accounts Payable (2nd Seller) $1,200y ( ) ,IA C. Accounts Receivable (1st Seller) $1,200
8 Division of Profit From Sale of Merchandise Inventory - #2
In E.g. $500 profit Who gets it? Intercompany price divides it between P & S
P gets $200 of profit ($1200 -$1000) &P gets $200 of profit ($1200 -$1000) & S gets $300 of profit ($1500 - $1200)
$1,200 price used to divide $500 profit between P&S:
S P TotalSales $1,500 $1,200 $2,700
Less: COGS 1200 1000 2200
Gross Profit $300 $200 $500
39 Division of Profit From Sale of Merchandise Inventory - #2
These WS entries are the same regardless of whether you have a NCI
You are presenting both P&S as if they are 1 Co.Th i t f NCI d t h thi The existence of NCI doesnt change this
It only affects who gets equity
10 EI Entry - Heading
EI Entry
No real sale unless you have sale to 3rd party (unrelated)
Without sale to 3rd party
11 Need Sale to Unrelated Third Party
Without sale to 3rd party Really just moving inventory from sellers to
buyers place of business Reporting as if 1 Co
You cant sell something to yourselfd No rev recognized unless ultimate sale to 3rd
party
12 Division of Profit From Sale of Merchandise Inventory - #2
S P TotalSales $1,500 $1,200 $2,700
Less: COGS 1200 1000 2200
d $
Less: COGS 1200 1000 2200
Gross Profit $300 $200 $500
NotBooked
Booked
If no sale to 3rd party P has taken $200 profit on its books
We want to delay $200K profit until S sells inv to 3rd Party
4BIG PICTURE: Until sale to 3rd party GAAP requires
Seller does not recognizes profit from
13 Defer Profit Until Sale to Third Party
intercompany sale Intercompany profit deferred (suspended)
until sale to 3rd party Inventory reduced to orig cost
After sale to 3rd partyAfter sale to 3 party P & S then report their share of profit on sale
of merchandise
If merchandise not sold to 3rd party in 1st year: 1st, do WS entries as if sale to outsider:
Same as before
14 EI Entry - #1
IS D. Sales Revenue (1st Seller) $1,200IS C. Cost of Goods Sold (2nd Seller) $1,200IA D. Accounts Payable (2nd Seller) $1,200IA C. Accounts Receivable (1st Seller) $1,200
15 EI Entry - #2
Then, We need to: Eliminate markup from inventory
Credit Inventory for amount of Sellers deferred profit
Eliminate Sellers profit:p Debit COGS for amount of Sellers deferred profit
An increased COGS reduces profit Allocate increased exp (COGS) to 1st Seller
Done in EI Entry EI stands for Ending Inventory
It suspends on WS (not books of P&S) the profit from the
EI D. Cost of Goods Sold $200EI C. Inventory $200
It suspends on WS (not books of P&S) the profit from the 1st sale (and the corresponding mark up of inv) until after the inv is sold in the 2nd sale.
16 EI entry E.g., - #101
E.g., Assume P buys inv for $10,000 P sells inv to S for $15,000 on credit
50% Mark Up
S does not sell inv to 3rd party in 1st year We do the following on the WS
IS D. Sales Revenue $15,000IS C. Cost of Goods Sold $15,000IA D. Accounts Payable $15,000IA C. Accounts Receivable $15,000
517 EI Entry E.g., - #102
S has all of inv at end of year EI entry
Defers Ps profit
EI D. Cost of Goods Sold $5,000EI C Inventory $5 000
Done with debit to COGS
Reduces cost of inv to orig cost Done with credit to Inv
EI C. Inventory $5,000
18 EI Entry E.g., - #102
Intercompany Sale D A/R 15000 Sellers Books-- Revenue C Sales 15000 Sellers BooksIntercompany Sale D COGS 10000 Sellers Books-- COGS C Inv 10000 Sellers Books
WS entries eliminate effects of intercompany sale
COGS C Inv. 10000 Seller s BooksIntercompany Sale D Inv. 15000 Buyers Books-- Purchase Inventory C A/P 15000 Buyers BooksIS Entry D Sales 15000 WS
C COGS 15000 WSIA Entry D A/P 15000 WS
C A/R 15000 WSC A/R 15000 WSEI Entry D COGS 5000 WS
C Inv 5000 WS
After these entries NOTHING LEFT OF INTERCOMPANY SALE
19 EI entry E.g., - #201
What if S sold half of the inventory Half is still unsold.
E.g., Assume P buys inv for $10,000 P sells inv to S for $15,000 on credit
50% Mark Up
S sells of inv to 3rd party in 1st year for $10,000 on credit
IS D. Sales Revenue $15,000IS D. Sales Revenue $15,000IS C. Cost of Goods Sold $15,000IA D. Accounts Payable $15,000IA C. Accounts Receivable $15,000
20 EI Entry E.g., - #202
S has of inv at end of year EI entry
Defers Ps profit on unsold of inv
EI D. Cost of Goods Sold $2,500EI C Inventory $2 500
Done with debit to COGS
Reduces cost of of inv to orig cost Done with credit to Inv
EI C. Inventory $2,500
621 EI Entry E.g., - #203
If of intercompany merchandise is sold to 3rdparty for $10,000 Sales Rev should be $10,000
This is the sale to the 3rd party real sale
A/R should be $10,000 This is the amount owed by 3rd party real A/R
COGS should be $5,000 This is the original cost of the inventory sold to 3rd party
of orig cost ($10,000/2)g ( )
Inv should go down by $5,000 This is the original cost of the inventory sold to 3rd party
of orig cost
22 Intercompany Sale D A/R 15000 Sellers Books-- Revenue C Sales 15000 Sellers BooksIntercompany Sale D COGS 10000 Sellers Books-- COGS C Inv. 10000 Sellers BooksIntercompany Sale D Inv. 15000 Buyers Books-- Purchase Inventory C A/P 15000 Buyers Books3rd P t S l D A/R 10000 B B k3rd Party Sale D A/R 10000 Buyers Books-- Revenue C Sales 10000 Buyers Books3rd Party Sale D COGS 7500 Buyers Books-- COGS C Inv. 7500 Buyers BooksIS Entry D Sales 15000 WS
C COGS 15000 WSIA Entry D A/P 15000 WS
C A/R 15000 WSEI Entry D COGS 2500 WS
C Inv 2500 WS
After you are done with these entries: Sales Rev $10K increase; A/R $10K increase COGS $5,000 increase; Inv $5,000 decrease
23 Division of Profit From Sale of Merchandise Inventory - #2
If P is intercompany seller Nothing wrong with Ss inc
Income Distribution Schedule of WS:
Subsidiary Income DistributionInternally generated net income $50,000
Adjusted income $50,000NCI share 20%
NCI $10,000
24 Division of Profit From Sale of Merchandise Inventory - #2
If P is intercompany seller & no sale to 3rd party Ps inc has intercompany profit which must be deferred
Done with EI entry Increase in COGS fro EI entry reduces profits on WS
Parent Income DistributionUnrealized profit in ending inventory
$5000 Internally generated net income
$100,000
Given to intercompany seller in Income Distribution Schedule
80% of Sub adjusted income of $50,000
40,000
Controlling Interest $135,000
725 BI Entry - Heading
BI Entry
26 BI Entry - #1
What about the next year? If intercompany merchandise is sold to 3rd party Now, intercompany seller can take deferred profit
PROBLEM ll t k d f d i t PROBLEM seller took deferred intercompany profit last year on its books So, deferred intercompany profit is already reported in
1st sellers RE 1st need to eliminate deferred intercompany
profit from 1st sellers beginning REprofit from 1st seller s beginning RE 2nd give 1st seller deferred intercompany profit
this year
27 BI Entry - #2
WS entry called BI for Beginning Inventory Debit to RE reduces beginning balance of RE
When P gets deferred profit that will i RE t d f thiincrease RE at end of this year
Credit to COGS increases profits Given to intercompany seller Gives intercompany seller profit deferred
from previous year
BI D. Retained Earnings $5,000
BI C. Cost of Goods Sold $5,000
28 BI Entry Income Distribution Schedule - #1
If P is intercompany seller Nothing wrong with Ss inc
I Di t ib ti S h d l f WS
Subsidiary Income DistributionInternally generated net income $50,000
Adjusted income $50,000
Income Distribution Schedule of WS:
NCI share 20%
NCI $10,000
829 BI Entry Income Distribution Schedule - #2
Assume P gets deferred profit from last year - $5K
BI Entry
Parent Income DistributionInternally generated net income $100,000
Deferred Profit In Beginning Inventory
5,000
80% of Subsidiary adjusted $
40,000income of $50,000
Controlling Interest $145,000
30 Intercompany Sales of Merchandise Miscellaneous Issues - Heading
Intercompany Sales of Merchandise Miscellaneous Issues Miscellaneous Issues
31 Intercompany Sales of Merchandise Miscellaneous Issues - Heading
Controlling Interest vs. Non-Controlling InterestNon-Controlling Interest
32 Division of Profit From Sale of Merchandise Inventory - #2
Remember that intercompany price divides it between P & S P gets $200 of profit ($1200 -$1000) & S gets $300 of profit ($1500 - $1200)g p ( )
S P TotalSales $1,500 $1,200 $2,700
Less: COGS 1200 1000 2200
Gross Profit $300 $200 $500Gross Profit $300 $200 $500
9 This is important if NCI NCI gets share of Ss profit NCI gets none of Ps profit
33 Division of Profit From Sale of Merchandise Inventory - #1
NCI gets none of P s profit
34 If Subsidiary is Intercompany Seller - #1
BI D. Retained Earnings $5,000BI C. Cost of Goods Sold $5,000
When P is intercompany seller
BI entry has debit to RE:
When P is intercompany seller Use Ps RE
When 100% owned S is intercompany seller Use Ps RE
When S (with NCI) is intercompany seller Use Ps RE for CI share of deferred profit Use Ss remaining RE for NCI share of deferred profit
35 If Subsidiary is Intercompany Seller - #1
E.g., If P owns 80% of S, then split debit to RE:
BI D. Retained Earnings, Parent (80%) $4KRetained Earnings, Sub. (20%) 1K
BI C. Cost of Goods Sold $5K
36 Intercompany Sales of Merchandise Miscellaneous Issues - Heading
Intercompany Sales of Merchandise At LossAt Loss
10
37 Periodic Inventory System
What if intercompany sale produces a loss If inventory really dropped in value
I t ll i l Intercompany seller can recognize loss Can recognize loss w/o sale using LCM anyway
If the loss is artificial Loss is deferred until sale to 3rd party
38 Intercompany Sales of Non-Depreciable Asset - Heading
Intercompany Sales of Non-Depreciable Asset (Land)Depreciable Asset (Land)
39 Intercompany Sales of Non-Depreciable Asset - #1
Intercompany sale of non-depreciable asset (Land) gain deferred until asset sold to unrelated 3rdgain deferred until asset sold to unrelated 3
party If asset never sold, deferral is permanent WS entry called LA Entry
LA stands for Land or Land Adjustment
40 Intercompany Sales of Non-Depreciable Asset - #1
1st Year Debit for gain defers intercompany sellers gain Credit eliminates mark-up (intercompany profit) from
LA D. Gain on Sale of Land $Mark-Up
Credit eliminates mark up (intercompany profit) from cost of Land
Returns Land to its original cost
LA C. Land $Mark-Up
11
41 Intercompany Sales of Non-Depreciable Asset - #2
Later Years If P is intercompany seller
LA D. Retained Earnings, Parent $Mark-Up
LA C. Land $Mark-Up
This WS entry done each year until Land is sold to 3rd party
42 Intercompany Sales of Non-Depreciable Asset - #3
Year where Land sold to 3rd party Still need to take it out of sellers RE
Doesnt belong there YETD bit RE
LA D. Retained Earnings, Parent $Mark-Up
Debit RE
Allow intercompany seller to take profit Credit to Gain
g p
LA C.Gain on Intercompany
Sale of Land$Mark-Up
43 Intercompany Sales of Depreciable Assets - Heading
Intercompany Sales of Depreciable AssetsAssets
44 Intercompany Sales of Depreciable Asset - #1
Gains from Intercompany sale of depreciable assets are similar to Land Gain deferred until asset sold to unrelated 3rdGain deferred until asset sold to unrelated 3
party Write down asset back to orig cost.
Also need to undo depreciation taken on buyers books for mark-up
A t i b b k t hi h l Asset is on buyers books at higher value It is producing too much depreciation
Need to undo that extra depreciation exp
12
45 F1 Worksheet Entry
There are two FA entries First we eliminate the intercompany gain on the
FA1 D. Gain on Sale of Machinery
$10,000
FA1 C Machinery $10 000
sale of the machinery:
FA1 C. Machinery $10,000
46 F2 Worksheet Entry
Next, eliminate the increased depreciation expense on the machinery Just depreciation on the mark-up
FA2 D. Accumulated Depreciation $2,000
FA2 C. Depreciation Expense $2,000
p p
This WS entry reduces expenses reported on This WS entry reduces expenses reported on buyers books
It creates income on the WS (consolidation level)
Who gets this income?
47 Effect of Undoing Depreciation of Mark-Up - #1
We give extra income to seller 1st year seller loses gain 1st & later years seller gets increased 1st & later years seller gets increased
income Eventually, seller gets extra income = its
deferred intercompany gain This can be seen in Income Distribution
S h d l f WSSchedules of WS
48 Effect of Undoing Depreciation of Mark-Up - #2
Subsidiary Income DistributionI ll d i $25 000Internally generated net income $25,000
Adjusted income $25,000
NCI share 20%
NCI $5,000
13
49 Effect of Undoing Depreciation of Mark-Up - #3
Parent Income DistributionUnrealized gain
on the sale of $10,000 Internally generated
net income$30,000
machine80% of Subsidiary
adjusted income of $25,000
20,000
Gain realized through use of
2,000through use of machine sold to Subsidiary
Controlling Interest $42,000
50 F1 Worksheet Entry Second Year
The FA1 entry in the second year, is as follows Blue area reduces Machinery back to orig cost Yellow area reduces what remains of intercompany
gain
FA1 D. Retained Earnings, Parent $8K
gain Gain now in RE We disallowed $10K, but let seller have $2K more income
Net is 8K
g ,FA1 Accumulated Depreciation $2KFA1 Cr. Machinery $10K
51 F2 Worksheet Entry Second Year
FA2 entry in 2nd year same as 1st:
FA2 D. Accumulated Depreciation $2,000
FA2 C. Depreciation Expense $2,000
52 Income Distribution Schedules Second Year - #1
The Income Distribution Schedules for 2nd year would appear as follows:
Subsidiary Income DistributionInternally generated net income $24,000
Adjusted income $24,000
NCI h 20%NCI share 20%
NCI $4,800
14
53 Income Distribution Schedules Second Year - #2
Parent Income DistributionI ll d i $50 000Internally generated net income $50,00080% of Subsidiary income of $24K 19,200Gain realized through use of
machine sold to Subsidiary2,000
Controlling Interest $71,200Controlling Interest $71,200
54 F1 Worksheet Entry Third Year
The FA1 entry in the third year, is as follows Blue area reduces Machinery back to orig cost Yellow area reduces what remains of
intercompany gain
A1 R i d E i P $6 000
intercompany gain Gain now in RE We disallowed $10K, but let seller have $4K more
income Net is 6K
FA1 D. Retained Earnings, Parent 1/1/2002
$6,000
FA1 Accumulated Depreciation 4,000
FA1 Cr. Machinery $10,000
55 Intercompany Construction of Depreciable Assets - Heading
Intercompany Construction of Depreciable AssetsDepreciable Assets
56 Intercompany Construction of Depreciable Asset - #1
What if one member of consolidation group constructs asset for affiliated client? Builder is selling depreciable asset to ClientBuilder is selling depreciable asset to Client Do the same entries we just talked about
This subject introduces new entries dealing with the construction period.
15
57 Intercompany Construction of Depreciable Asset - #2
Builder and client are using accounts that are appropriate for two unrelated parties Wrong account names are being usedg g Using account names used by contractor and
client But, we are presenting the two Cos as if
they are 1 Co. We have to change the names of the We have to change the names of the accounts to reflect 1Co building asset for itself
58 Intercompany Construction of Depreciable Asset - Builders entries - #1
Look at the entries made by P&S on their books
S (builder) records cost of construction during 1st year on Ss books:
D. Construction in Progress $200,000C. Payables $200,000
Construction in Progress is the name used by a contractor Asset Under Construction is the name used by
1 year on S s books:
contractor. Asset Under Construction is the name used by a Co building its own Asset
Remember, we are presenting P&S as if one Co.
59 Intercompany Construction of Depreciable Asset - Builders entries - #1A
Builders Balance SheetConst In Prog $200K Payables $200K
`
60 Intercompany Construction of Depreciable Asset Builders Entries - #2
The S (builder) records billings on Ss books:
D. Contracts Receivable $150,000C. Billings on Construction in Progress $150,000
The Billings account is a contra account that reduces the Construction in Progress account.
The Contracts Receivable is an Intercompany Account One Co cannot owe money to itself.
16
61 Intercompany Construction of Depreciable Asset - Builders entries - #2A
Builders Balance SheetConst In Prog $200K Payables $200KBillings -150K
$50K`
$50KContract Rec. 150K
62 Intercompany Construction of Depreciable Asset - Clients entries - #1
D Assets Under Construction $150 000
P (client) also records billings on Ps books:
D. Assets Under Construction $150,000C. Contracts Payable $150,000
Asset Under Construction is the correct name for Co building an asset for itself, but the Amount ($150K) is too small. Contracts Payable is an Intercompany Account.
63 Intercompany Construction of Depreciable Asset - Clients entries - #1A
Builders Balance SheetConst In Prog $200K Payables $200KBillings -150K
$50K`
$50KContract Rec. 150K
Clients Balance Sheet$ $Asset Und Constr. $150K Contract Pay. $150K
64 LT1 Entry - #1
On WS want to eliminate Intercompany Accounts (A/R & A/P):
LT1 D. Contracts Payable $150,000LT1 C. Contracts Receivable $150,000
Accounts (A/R & A/P):
17
65 LT1 Entry - #1A
Builders Balance SheetConst In Prog $200K Payables $200KBillings -150K
$50K`
$50KContract Rec. 150K
Clients Balance Sheet$ $Asset Und Constr. $150K Contract Pay. $150K
66 LT2 Entry - #1
Also want to eliminate Construction in Progress account & Billings account
Add unbilled construction cost to Asset Under
LT2 D. Billings on Construction in Progress $150,000LT2 Assets Under Construction 50,000
Add unbilled construction cost to Asset Under Construction.
LT2 C. Construction in Progress $200,000
67 LT2 Entry - #1A
Builders Balance SheetConst In Prog $200K Payables $200KBillings -150K
$50K`
$50KContract Rec. 150K
Clients Balance Sheet$ $Asset Und Constr. $150K Contract Pay. $150K
Add To Ass Und Constr. 50K$200K
68 End Result of LT1 & LT2 Entries
After LT1 & LT2 entries, left with: $ $200,000 balance in Assets Under Construction, and
Payables of $200,000
18
69 Consolidated Balance Sheet After LT1 & LT2
Consolidated Balance SheetAsset Under Construction $200K Payables $200K
`
70 Builders Intercompany Profit
(NOT ON TEST) Builder might take intercompany profit
(Percentage of Completion Method):
D. Construction in Progress $50K
C. Earned Income on Long-Term Contract $50K
71 LT 3 Entry
If so, eliminate Builders profit on WS:
LT3 D. Earned Income on Long-Term Contract $50KLT3 C. Construction in Progress $50K
72 Intercompany Lending - Heading
Intercompany Lending
19
73 LN1 Entry
If there is intercompany borrowing? Eliminate the Intercompany note:
LN1 D. Notes Payable $10,000LN1 C. Notes Receivable $10,000
Eliminate the Intercompany note:
74 LNs Entry
Eliminate interest receivable and payable:
LN2 D. Interest Payable $400LN2 C. Interest Receivable $400
75 LN1 Entry
Eliminate interest income and expense:
LN3 D. Interest Income $400LN3 C. Interest Expense $400