Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King Intercompany Inventory Transactions 7 Electronic Presentation by Douglas Cloud Pepperdine University

Aspects of Workpaper Elimination When intercorporate sales include profits or losses, there are two aspects of the workpaper elimination needed in the period of transfer to prepare consolidated financial statements.

Aspects of Workpaper Elimination Elimination of the income statement effects of the intercorporate sale in the period in which the sale occurs, including the sales revenue from the intercorporate sale and the related cost of goods sold recorded by the transferring affiliate. Elimination from the inventory on the balance sheet of any profit or loss on the intercompany sale that has not been confirmed by resale of the inventory to outsiders.

Downstream Sale -- Perpetual Inventory Peerless Products Mar. 1 Inventory 7,000 Cash 7,000 Purchase of inventory. Special Foods Peerless Products March 1, 20X1 Purchased inventory for $7,000 Consolidated Entity

Intercorporate transfer of inventory $10,000 Downstream Sale -- Perpetual Inventory Peerless Products Apr. 1 Cash 10,000 Sales 10,000 Sale of inventory to Special Foods. Special Foods Apr. 1 Inventory 10,000 Cash 10,000 Purchase of inventory from Peerless. Peerless Products Apr. 1 Cost of Goods Sold 7,000 Inventory 7,000 Cost of inventory sold to Special Foods. Special Foods Peerless Products April 1, 20X1 Intercorporate transfer of inventory $10,000 Consolidated Entity

Downstream Sale -- Perpetual Inventory Special Foods Nov. 5 Cash 15,000 Sales 15,000 Sale of inventory to Nonaffiliated. Special Foods Nov. 5 Cost of Goods Sold 10,000 Inventory 10,000 Cost of inventory sold to Nonaffiliated. Special Foods Peerless Products Nov. 5, 20X1 Sell inventory for $15,000 Consolidated Entity

Downstream Sale -- Perpetual Inventory 20X1 Peerless Special Unadjusted Consolidated Item Products Foods Totals Amounts Sales $10,000 $15,000 $25,000 $15,000 Cost of goods sold -7,000 -10,000 -17,000 -7,000 Gross profit $ 3,000 $ 5,000 $ 8,000 $ 8,000

Downstream Sale -- Perpetual Inventory Gross profit of $8,000 is correct from a consolidated viewpoint, but consolidated sales and cost of goods sold should be $15,000 and $7,000 respectively, rather than $25,000 and $17,000. In the consolidation workpaper, the intercompany sale must be eliminated. Sales 10,000 Cost of goods sold 10,000 Eliminate intercompany inventory sale.

Inter-corporate transfer of inventory $10,000 Resale in Period Following Transfer Peerless Products Special Foods March 1, 20X1 Purchased inventory for $7,000 April 1, 20X1 Inter-corporate transfer of inventory $10,000 January 2, 20X2 Sell inventory for $15,000 Consolidated Entity

Basic Equity-Method Entries--20X1 During 20X1, Peerless records its pro rata portion of Special Foods’ net income and dividends for 20X1: (8) Investment in Special Foods Stock 40,000 Income from Subsidiary 40,000 Record equity-method income. $50,000 x .80 (9) Cash 24,000 Investment in Special Foods Stock 24,000 Record dividends from Special Foods. $30,000 x .80

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 40,000 (l0) 40,000 Dividends Declared (60,000) (30,000) (10) 24,000 Investment in Special Foods 256,000 (10) 16,000 Income from Subsidiary 40,000 Dividends Declared (60,000) (30,000) Investment in Special Foods 256,000 Income from Subsidiary 40,000 Dividends Declared (60,000) (30,000) Investment in Special Foods 256,000 An entry is needed to eliminate Peerless’s share of Special Foods’ income and dividends. This entry also eliminates the change in the investment account for the period.

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (11) 10,000 (10,000) (11) 6,000 (60,000) (11) 4,000 Income to Non- controlling Interest Dividends Declared (60,000) (30,000) (10) 24,000 Noncontrolling Income to Non- controlling Interest Dividends Declared (60,000) (30,000) 24,000 Noncontrolling The noncontrolling interest is assigned a pro rata portion of the net income of Special Foods. Also, the noncontrolling stockholders’ share of Special Foods’ dividends is eliminated and the noncontrolling interest is increased to reflect the excess of Special Foods’ income over its dividends.

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated , (12)100,000 300,000 (12) 240,000 (12)200,000 500,000 (12) 60,000 64,000 Retained Earnings, January 1 300,000 100,000 Investment in Special Foods 256,000 (10) 16,000 Common Stock-- Special Foods 500,000 200,000 Noncontrolling Interest (11) 4,000 An entry is needed to eliminate the beginning balances of Special Foods’ stockholders’ equity accounts and Peerless’s investment account. This entry also needs to establish the noncontrolling interest at the beginning of the period.

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (13) 10,000 590,000 (13) 7,000 278,000 (13) 3,000 172,000 Sales 400,000 200,000 Cost of Goods Sold 170,000 115,000 Inventory 100,000 75,000 An entry is required to eliminate the effects of the intercompany sale of inventory.

Downstream Sale -- Inventory Not Resold 20X1 Peerless Special Unadjusted Consolidated Item Products Foods Totals Amounts Sales $10,000 $ -0- $10,000 $ -0- Cost of goods sold -7,000 -0- -7,000 -0- Gross profit $ 3,000 $ -0- $ 3,000 $ -0- Inventory $ -0- $10,000 $10,000 $7,000

Consolidated Net Income--20X1 Peerless’s separate operating income $140,000 Less: Unrealized intercompany profit on downstream inventory sale -3,000 Peerless’s separate realized income $137,000 Peerless’s share of Special Foods’ income: Special Food’s net income $50,000 Peerless’s proportionate share x .80 40,000 Consolidated net income, 20X1 $177,000

Basic Equity-Method Entries--20X2 During 20X2, Peerless records its pro rata portion of Special Foods’ net income and dividends for 20X2: (14) Investment in Special Foods Stock 60,000 Income from Subsidiary 60,000 Record equity-method income. $75,000 x .80 (15) Cash 32,000 Investment in Special Foods Stock 32,000 Record dividends from Special Foods. $40,000 x .80

Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 60,000 Dividends Declared (60,000 (40,000) Investment in Special Foods 284,000 (16) 60,000 (16) 32,000 (16) 28,000 ) An entry is needed to eliminate the effects of income from Special Foods and from Peerless’s share of dividends.

Consolidation Workspaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income to Noncontrolling Interest Dividends Declared (60,000) (40,000) (16) 32,000 (17)15,000 (15,000) (17) 8,000 (60,000) (17) 7,000 An entry is needed to assign the noncontrolling shareholders their share of income and establish the 20X2 increase in the claim of noncontrolling shareholders on the net assets of Special Foods.

Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 420,000 120,000 Investment in Special Foods 284,000 (16) 28,000 Common Stock 500,000 200,000 Noncontrolling Interest (17) 7,000 (18)120,000 420,000 (18)256,000 (18)200,000 500,000 (18) 64,000 71,000 A workpaper entry is needed to eliminate the beginning stockholders’ equity balances of Special Foods and Peerless’s beginning investment balance.

An entry is required to eliminate beginning inventory profit. Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (19) 3,000 337,000 (19) 3,000 417,000 Cost of Goods Sold 180,000 160,000 Retained Earnings, January 1 420,000 120,000 (18)120,000 An entry is required to eliminate beginning inventory profit.

Consolidated Net Income--20X2 Peerless’s separate income $160,000 Realization of deferred intercompany profit 3,000 Peerless’s separate realized income $163,000 Peerless’s share of Special Food’s income: Special Foods’ net income $75,000 Peerless’s proportionate share x .80 60,000 Consolidated net income, 20X2 $223,000

Inter-corporate transfer of inventory $10,000 Upstream Sale--Perpetual Inventory Special Foods Peerless Products Jan. 2 20X2 Sell inventory for $15,000 March 1, 20X1 Purchased inventory for $7,000 April 1, 20X1 Inter-corporate transfer of inventory $10,000 Consolidated Entity

Basic Equity--Method Entries--20X1 (21) Investment in Special Foods Stock 40,000 Income from Subsidiary 40,000 Record equity-method income. $50,000 x .80 (22) Cash 24,000 Investment in Special Foods Stock 24,000 Record dividends from Special Foods. $50,000 x .80

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 40,000 Dividends Declared (60,000 (30,000) Investment in Special Foods 256,000 (23) 40,000 (23) 24,000 (23) 16,000 ) An entry is needed to eliminate the effects of income from Special Foods and from Peerless’s share of dividends.

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated - (24) 9,400 (9,400) (24) 6,000 (60,000) (24) 3,400 Income to Non- controlling Interest Dividends Declared (60,000) (30,000) 24,000 Noncontrolling Income to Non- controlling Interest Dividends Declared (60,000) (30,000) (23) 24,000 Noncontrolling The noncontrolling interest is assigned a pro rata portion of the net income of Special Foods. Also, the noncontrolling stockholders’ share of Special Foods’ dividends is eliminated and the noncontrolling interest is increased to reflect the excess of Special Foods’ income over its dividends.

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 300,000 100,000 Investment in Special Foods 256,000 (23) 16,000 Common Stock 500,000 200,000 Noncontrolling Interest (24) 3,400 (25)100,000 300,000 (25) 240,000 (25)200,000 500,000 (25) 60,000 63,400 An entry is needed to eliminate the beginning balances of Special Foods’ stockholders’ equity accounts and Peerless’s investment account. This entry also needs to establish the noncontrolling interest at the beginning of the period.

Consolidation Workpaper--20X1 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (26)10,000 590,000 (26) 7,000 278,000 (26) 3,000 172,000 Sales 400,000 200,000 Cost of Goods Sold 170,000 115,000 Inventory 100,000 75,000 An entry is required to eliminate the intercompany upstream sale of inventory.

Consolidated Net Income--20X1 Peerless’s separate operating income $140,000 Peerless’s share of Special Foods’ income: Special Food’s net income $50,000 Less: Unrealized intercompany profit on upstream inven- tory sale -3,000 Special Foods’ realized income $47,000 Peerless’s proportionate share x .80 37,600 Consolidated net income, 20X1 $177,600

Basic Equity--Method Entries--20X2 (27) Investment in Special Foods Stock 60,000 Income from Subsidiary 60,000 Record equity-method income. $75,000 x .80 (28) Cash 32,000 Investment in Special Foods Stock 32,000 Record dividends from Special Foods. $75,000 x .80

Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Income from Subsidiary 60,000 Dividends Declared (60,000 (40,000) Investment in Special Foods 284,000 (29) 60,000 (29) 32,000 (29) 28,000 ) An entry is needed to eliminate the effects of income from Special Foods and from Peerless’s share of dividends.

Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated (30)15,600 (15,600) (30) 8,000 (60,000) (30) 7,600 Income to Noncontrolling Interest Dividends Declared (60,000) (40,000) (29) 32,000 An entry is needed to assign the noncontrolling shareholders their share of income and establish the 20X2 increase in the claim of noncontrolling shareholders on the net assets of Special Foods.

Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Retained Earnings, January 1 420,000 120,000 Investment in Special Foods 284,000 (29) 28,000 Common Stock 500,000 200,000 Noncontrolling Interest (30) 7,600 (31)120,000 420,000 (31)256,000 (31)200,000 500,000 (31) 64,000 A workpaper entry is needed to eliminate the beginning stockholders’ equity balances of Special Foods and Peerless’s beginning investment balance.

Consolidation Workpaper--20X2 Peerless Special Eliminations Item Products Foods Debits Credits Consolidated Cost of Goods Sold 180,000 160,000 Retained Earnings, January 1 420,000 120,000 (31) 120,000 Noncontrolling Interest (30) 7,600 (31) 64,000 (32) 3,000 337,000 (32) 2,400 417,600 (32) 600 71,000 A workpaper entry is needed to eliminate the beginning inventory profit: $3,000 x .80 and $3,000 x .20.

Consolidated Net Income--20X2 Peerless’s separate operating income $160,000 Peerless’s share of Special Foods’ income: Special Food’s net income $75,000 Realized intercompany profit on upstream inventory sale 3,000 Special Foods’ realized income $78,000 Peerless’s proportionate share x .80 62,400 Consolidated net income, 20X2 $222,400

Chapter Seven The End