IntraEntity Transactions

IntraEntity Transactions - UniversityofRhodeIsland

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University of Rhode Island BUS 402 Advanced Accounting 2010 - 2011 Joseph M. D’Adamo Course Outline #6: Intra-Entity Transactions Page 1 of 16 I. Intra-Entity Sales of Inventory A. Nature and Purpose of Transactions 1. Vertically-Integrated Parent-Subsidiary Business combinations of entities at different levels of the value-chain in which acquirer  seeks competitive advantages by gaining control of its suppliers (the supply end) and its  distribution channels (the demand end) Purchases-sales transactions between the Parent and Subsidiary   Normal business  operations One-Entity Perspective:  the goods stay within (intra) the one economic entity until sold  to outside customers 2. Other Combinations Inventory purchases-sales transactions between the Parent and Subsidiary   Less Likely B.  Eliminate Sale and Purchase Transactions 1. Eliminate Revenue and Expense recorded by Intra-Entity Seller and Buyer  Eliminate sales against cost of sales even if some intra-entity items remain in inventory Separately Account for  intra-entity items remaining in inventory You can’t sell and buy something to and from yourself. 2. Elimination Avoids Gross Up Prevents entities from inflating sales volume by intra-entity transactions
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Course Outline #6: Intra-Entity Transactions Page 2 of 16 Want to accurately depict relationships among sales, cost of goods sold and profits 3. Effect on Profits   None Elimination Entry    Equal reduction  of  sales revenue  and  cost of sales expense ALWAYS ELIMINATE 100% REGARDLESS   OF PARENT’S PERCENTAGE CONTROLLING INTEREST C. Eliminate Seller’s Profit from Remaining Intra-Entity   Inventory  Eliminate 100%  of the  intra-entity seller’s profit from the intra-entity buyer’s inventory from the  consolidated statements  regardless  of parent’s percentage controlling interest You can’t recognize a profit on items in EI that you sold to and bought from yourself. 1. Returns Inventory to the Intra-Entity Seller’s Original Cost Basis Remove the intra-entity seller’s profit from the intra-entity buyer’s inventory and offset  against cost of sales 2. Elimination Effect Profits   Decrease profit of intra-entity seller a. Downstream Transactions Parent sells to Sub Intra-entity profit was recorded  on parent’s books b. Upstream Transactions Sub sells to Parent Intra-entity profit was recorded  on sub’s books   Relevant when a non-controlling interest in the subsidiary exists (less than 100%  ownership) REMEMBER:  Elimination entries are  worksheet entries only .
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Course Outline #6: Intra-Entity Transactions Page 3 of 16 3. Beginning Inventory Effect
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This note was uploaded on 04/03/2012 for the course BUS 402 taught by Professor Joshephd'adamo during the Fall '09 term at Rhode Island.

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IntraEntity Transactions - UniversityofRhodeIsland

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