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Intercompany Merchandise Transactions

Intercompany Merchandise Transactions - Accounting 401...

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Accounting 401 Intercompany Merchandise Transactions A. The most common form of intercompany transactions involves the sale of merchandise from one affiliated company to another. B. Intercompany sales are recorded by the parent and subsidiaries just as if the sales were among companies not included in the consolidated group. C. However, since the sales (purchases) of goods involve only companies within the consolidated group, certain effects must be eliminated in the consolidation process. If all of the goods purchased by an affiliated company are sold to outside parties, no intercompany profit elimination is necessary. However, the intercompany sales and cost of goods sold must be eliminated. D. If some of the merchandise remains in the purchasing affiliate’s ending inventory, unrealized gain or loss must be eliminated in the consolidated working papers. The period in which the goods are sold will have realized profit from those intercompany sales. This situation is referred to as timing differences. E. Thus, intercompany profit becomes realized when the purchasing affiliate
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