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Advanced Financial Accounting Ch7 Lecture Notes

# Advanced Financial Accounting Ch7 Lecture Notes - 5-1...

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1 5-1 CHAPTER SEVEN Intercompany Inventory Transactions ACCT400 Advanced Financial Accounting Fall Semester 2008 5-2 Overview Remove revenues and expenses related to inventory transfer recorded by individual companies Ensure only historical cost of inventory is reported in consolidated B/S if inventory is still on hand Defer unrealized profit until inventory is sold to outsider Resulting F/S appear as if there is no intercompany transfer Assumption: Perpetual inventory system

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2 5-3 Downstream Inventory Sale Textbook example: Case 1: Resale in period of intercorporate transfer On December 31, 2000, P purchases 80% of S’s common stock for \$240,000 when BV of S’s stock is \$300,000 On March 1, 2001, P buys inventory for \$7,000 and resells to S for \$10,000 on April 1 the same year S resells inventory to outsider for \$15,000 on November 5, 2001 Important!!! No elimination of intercompany profit because it is realized through resale to outsider in same period 5-4 P’s journal entry: Mar 1 Inventory 7,000 Cash 7,000 Apr 1 Cash 10,000 Sales 10,000 Apr 1 Cost of goods sold 7,000 Inventory 7,000 S’s journal entry: Apr 1 Inventory 10,000 Cash 10,000 Nov 5 Cash 15,000 Sales 15,000 Nov 5 Cost of goods sold 10,000 Inventory 10,000
3 5-5 Analysis: Eliminating entry: Sales 10,000 Cost of goods sold 10,000 \$8,000 \$8,000 \$5,000 \$3,000 Gross profit \$0 \$0 \$0 \$0 Inventory (7,000) (17,000) (10,000) (7,000) -) COGS \$15,000 \$25,000 \$15,000 \$10,000 Sales Consolidated Unadjusted S P Item Sales 10,000 over COGS 10,000 over GP Inventory 5-6 Case 2: Resale in period following intercorporate transfer Same information except S resells inventory to outsider for \$15,000 on January 2, 2002 Important!!! Elimination of intercompany profit is required in period of intercorporate transfer Defer unrealized profit until resale to outsider Year 2001: \$30,000 \$50,000 S \$60,000 \$140,000 P Dividends Separate Income

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4 5-7 P’s journal entry: Mar 1 Inventory 7,000 Cash 7,000 Apr 1 Cash 10,000 Sales 10,000 Apr 1 Cost of goods sold 7,000
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