10.2-3 Lecture_30_Sept_and_2_October_Intragroup_Inventory_Transactions

10.2-3 Lecture_30_Sept_and_2_October_Intragroup_Inventory_Transactions

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1 ACIS 211 Company Accounting 2009 Intragroup Inventory Transactions Bill Foster Room 619 bill.foster@canterbury.ac.nz
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2 Tutorial exercises: week commencing 5 Oct part 2 Inventory profit problem 4 In your own time: week commencing 5 Oct part 2 Inventory profit problems 1, 2, and 3 (be sure to work Inventory profit problem 3)
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3 Overview I. Income tax considerations II. Downstream inventory sale III. Upstream inventory sale IV. Useful inventory profit conversion formula V. Upstream and downstream π in EI and π in BI example
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4 Reading NZ IAS 27 Deegan & Samkin Chapter 25 Alfredson Chapter 21
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5 I. Income tax considerations In order to facilitate a better understanding of the process of consolidation, we will ignore income tax effects
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6 II. Downstream inventory sale Assume P owns 90% of S In year 1 P sells inventory to S for 10,000 The inventory has a carrying amount on P’s books of 7,000 Initially, assume the periodic inventory method for discussion purposes (even though we will be using the perpetual inventory method) S still has the inventory at the end of year 1 The entries on both sets of books are P Co S Co Cash 10,000 Purchases 10,000 Sales 10,000 Cash 10,000 S’s physical inventory count (stock take) at the end of year 1 shows inventory of 10,000
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7 Because S still has the inventory at the end of year 1, the profit of 3,000 (10,000 – 7,000) is unconfirmed from a consolidated standpoint On the worksheet we need to make it appear as if there was no intragroup sale during year 1 The objective is to show no sale and report the inventory at P’s cost of 7,000
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8 With the periodic inventory method the year 1 worksheet elimination entries would look like (9a) Sales 10,000 Purchases 10,000 Inventory (top tier) 3,000 (A) Inventory 3,000 π in EI P S 3,000
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9 Inventory appears in two places It is an asset on the balance sheet Remove the profit by crediting the asset account Ending inventory is subtracted in arriving at COGS Ending inventory in the top tier has a credit balance (it reduces an expense, COGS) Ending inventory contains unconfirmed profit We need to reduce ending inventory in the top tier with a debit
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10 Now assume the perpetual inventory method S still has the inventory at the end of year 1 The entries on both sets of books are P Co S Co Cash 10,000 Inventory 10,000 Sales 10,000 Cash 10,000 COGS 7,000 Inventory 7,000
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11 year 1 worksheet (9a) Sales 10,000 Purchases COGS 10,000 To eliminate intragroup sales for this year Inventory COGS 3,000 (A) Inventory 3,000 To eliminate profit in the EI One approach to convert from periodic to perpetual is to simply replace the components of cost of goods sold in the periodic worksheet with COGS π in EI P S 3,000
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12 Alternatively, for the perpetual inventory method, we could (9a) Sales 10,000 COGS 7,000 (A) Inventory 3,000 To eliminate profit in the EI This combined approach is also acceptable
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13 We will also need an additional equity method entry in year 1 to take the unconfirmed profit away Remember P uses the cost method on its books Knowledge of what P would have done under the equity method provides us with a conceptual check of consolidated net profit and consolidated retained earnings
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This note was uploaded on 12/23/2009 for the course BCOM ACIS 211 taught by Professor Susanwild during the Spring '09 term at Canterbury.

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10.2-3 Lecture_30_Sept_and_2_October_Intragroup_Inventory_Transactions

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