Ch.5_notes

Ch.5_notes - CHAPTER 5 INTERCOMPANY TRANSACTIONS INVENTORY...

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CHAPTER 5 INTERCOMPANY TRANSACTIONS - INVENTORY I. DOWNSTREAM SALES Example 1 - ( No Unrealized profits in Inventory ) The following information summarizes the relation and transactions between P Company and S Company during 20X1. 1. P Company sells all goods it manufactures to S Company, its wholly owned subsidiary, at 125% of cost. 2. During 20X1, the first year of operations, goods that cost P $200,000 to produce are sold to S for $250,000. 3. During the same year, S sold all the goods purchased from P to third parties for $350,000. Journal Entries Books of P Company INVENTORY 200,000 WIP 200,000 A/R 250,000 SALES 250,000 COGS 200,000 INVENTORY 200,000 Books of S Company INVENTORY 250,000 A/P 250,000 A/R 350,000 SALES 350,000 COGS 250,000 INVENTORY 250,000 Consolidation Working Papers P Company and Subsidiary for year ended 12/31/20X1 Income Statement P Company S Company Debit Credit Consol. Sales 250,000 350,000 a 250,000 350,000 1
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Cost of Sales 200,000 250,000 a 250,000 200,000 Gross profit 50,000 100,000 150,000 (a) to eliminate inter-company sales. Example 2 - ( Unrealized profits in Ending Inventory ) Assume the same information as in Example 1, except that during 20X1 Company S sells only half of the goods it purchased from P Company to outside parties. Journal Entries Books of P Company INVENTORY 200,000 WIP 200,000 A/R 250,000 SALES 250,000 COGS 200,000 INVENTORY 200,000 Books of S Company INVENTORY 250,000 A/P 250,000 A/R 175,000 SALES 175,000 COGS 125,000 INVENTORY 125,000 Consolidation Working Papers for year ended 12/31/20X1 Income Statement P Company S Company Debit Credit Consol. Sales 250,000 175,000 a 250,000 175,000 Cost of Sales 200,000 125,000 b 25,000 a 250,000 100,000 Gross profit 50,000 50,000 75,000 Bal. Sheet Inventory -0- 125,000 b 25,000 100,000 2
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profit are overstated from the standpoint of the consolidated entity as follows: (1) Ending Inventory : Cost to S $125,000 Cost to P 100,000 Overstatement $ 25,000 (2) Gross Profit : P has recognized gross profit of $50,000 on his books, half $25,000) of which relates to inventory that has not been sold to parties outside the consolidated entity (i.e., it is unrealized). Example 3 - ( Unrealized Profits in Ending Inventory ) Assume the same information as in Example 2, and also assume that the "Other Expenses" during 20X1 are $10,000 for Company P and $5,000 for Company S. Consolidation Working Papers for year ended 12/31/20X1 Income Statement P Company S Company Debit Credit Consol. Sales 250,000 175,000 a 250,000 175,000 Cost of Sales 200,000 125,000 b 25,000 a 250,000 100,000 Gross profit 50,000 50,000 75,000 Income from S 20,000 --- c 20,000 -0- Other Expenses 10,000 5,000 15,000 Net Income 60,000 45,000 60,000 Bal. Sheet Inventory -0- 125,000 b 25,000 100,000 Investment in S Company Xxx c 20,000 -0- (a) to eliminate inter-company sales. 3
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This note was uploaded on 04/05/2008 for the course ACCT 401 taught by Professor Schoderbek during the Spring '08 term at Rutgers.

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Ch.5_notes - CHAPTER 5 INTERCOMPANY TRANSACTIONS INVENTORY...

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