Chapter 5 Outline - Chapter 5 Consolidated Financial...

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Chapter 5 – Consolidated Financial Statements— Intercompany Asset Transactions Intercompany inventory transactions An intercompany transfer is merely the internal movement of inventory, an event that creates no net change in the financial position of the business combination taken as a whole. In producing consolidated financial statements, the recorded effects of these transfers are eliminated. The sales and purchases accounts Example: Arlington Company makes an $80,000 inventory sale to Zirkin Company, an affiliated party within a business combination, both parties record the transfer in their internal records as a normal sale/purchase. The following consolidation worksheet entry is then necessary to remove the resulting balances from the externally reported figures. Consolidation Entry TI Sales 80,000 Cost of Goods Sold (purchases component) 80,000 To eliminate effects of intercompany transfer of inventory. (Labeled “TI” in reference to the transferred inventory.) Unrealized gross profit-year of transfer (year 1) Intercompany profits that remain unrealized at year-end must be removed in arriving at consolidated figures. All inventory remains at year-end Example: Arlington acquired or produced the inventory at a cost of 450,000 and then sold it to Zirkin, an affiliated party, at the indicated $80,000 price. Although the consolidation entry TI shown earlier eliminated the sale/purchase figures, the 430,000 inflation created by the transfer price still exists in two areas of the individual statements: Ending inventory remains overstated by $30,000 Gross profit is artificially overstated by this same amount Correcting ending inventory requires only reducing the asset. Consolidation Entry G – year of transfer (year 1) all inventory remains Cost of goods sold (ending inventory component) 30,000 Inventory (balance sheet account) 30,000 To remove unrealized gross profit created by intercompany sale. Only a portion of inventory remains The elimination of unrealized gross profit (Entry G) is based not on total intercompany sales but only on the amount of transferred merchandise retained within the business at the end of the year. Example: Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording gross profit of $30,000. Assume further that by year end Zirkin has resold
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$60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). The markup was 37 ½ percent ($30,000 gross profit/$80,000 transfer price). Consolidation entry G - year transfer (year 1) 25% of inventory remains (replaces previous entry) Cost of goods sold (ending inventory component) 7,500 Inventory 7,500 To remove portion of intercompany gross profit that is unrealized in year of transfer. Unrealized gross profit – year following transfer (year 2)
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This note was uploaded on 11/30/2010 for the course ACCT acct 4330 taught by Professor Gamble during the Spring '10 term at University of Houston.

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Chapter 5 Outline - Chapter 5 Consolidated Financial...

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