1. Cynthia Fortin, CPA, CMA Spring 2017
Group Financial Reporting ACF 202 PART 3 Intercompany current accounts Provision for unrealised profits (purp)
Cynthia Fortin, CPA, CMA
Spring 2017

2. Inter-company transactions
Group companies
Even if amounts are not equal they still have to be eliminated.
Transactions must be eliminated because they do not sell to the outside.
Trade with each other
Receivables/Payables
Goods or cash in transit
Inter-company transactions

3. Inter-company transactions
Include cash and goods in transit
Exclude current inter-company account balances
Are eliminated in cross casting
We assume that
Goods in transit
Cash in transit
Are received
Inter-company transactions

4. Let’s do Vietnam, then Turkey

5. Provision for unrealised profits (purps)
Can you make a profit by selling to yourself?
No you cannot. The same applies to Parent and Subsidiary. So remember there is no profit between P and S.

6. Inter-company transactions
Provision for unrealised profit (purp)
Even if amounts are not equal they still have to be eliminated.
At consolidation we treat P and S as if one entity.
P is the seller
Profits of P are reduced in retained earnings via W5.
Adjust to eliminate the profit in P and the cost in S to bring it back to the original cost
S is the seller
Profits of S are reduced in retained earnings via W2 by splitting it between P and NCI in W5.
Inter-company transactions

7. PURPS
P sells goods to $100 Cost 75 Profit 25 S has therefore goods in $100. At consolidation we treat P and S as if one entity. An adjustment must be made to eliminate the profit in P and the cost in S to bring it back to the original cost. We must adjust to eliminate $25 profit for the seller and reduce inventory for the buyer by $25.

8. Inter-company transactions
PURPs
With a markup
convert to margin %
With a margin
Mark-up
100 + mark-up
= margin %
Price * margin % = profit
Inter-company transactions

9. PURPs with a margin
P sells goods $200 to a margin of 20% P is the seller Margin means profit = 20% * 200 = $40 Therefore $40 is eliminated in S’s inventory because S is the buyer to bring it back to original cost via cross casting during consolidation. $40 is eliminated in P’s profit via retained earnings in W5 because P is the seller, the one making the profit.

10. PURPs with a mark-up
P sells goods $200 to a mark-up of 25% mark-up mark-up Apply 20% margin to $200 = $40 profit
= = or 20%
125

11. Exemple
There were inter-company sales of $900 at a gross profit mark-up of 50%. At the year-end the buying group company had sold $150 of these goods. The parent has an 80% interest in the subsidiary.
Required
Calculate the purp.
Show the accounting treatment of the purp if the parent company is the seller.
Show the accounting treatment of the purp if the subsidiary company is the seller.
Clendon p. 106

12. Example Two years ago an item of property plant and equipment (PPE) with a carrying value of $2,000 was sold from one group company to another for $2,500. At the date of the transfer the asset had a remaining useful life of 5 years. Required Calculate the net purp adjustment required in the group accounts.
Clendon p. 107

13. Let’s do Thomas Sweeney Then Wales Excel demo problems (Autosaved)
Let’s do Thomas Sweeney Then Wales Excel demo problems (Autosaved).xlsx

14. References
Clendon, Tom (2013), “A Student's Guide to Group Accounts, 2nd Ed.”, Kaplan Publishing UK ISBN: chapters 8, 9.