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

2. 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.

3. 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.

4. 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

5. 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

6. 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

7. 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
Gross profit $ 3,000 $ 5,000 $ 8,000 $ 8,000

8. 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.

9. 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

10. 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

11. 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, (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.

12. 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.

13. Consolidation Workpaper--20X1
Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated ,
(12)100, ,000
(12) 240,000
(12)200, ,000
(12) 60,000 64,000
Retained Earnings,
January 1 300, ,000
Investment in
Special Foods 256,000 (10) 16,000
Common Stock--
Special Foods 500, ,000
Noncontrolling
Interest (11) ,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.

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

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

16. Consolidated Net Income--20X1
Peerless’s separate operating income $140,000
Less: Unrealized intercompany profit
on downstream inventory sale ,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 ,000
Consolidated net income, 20X1 $177,000

17. 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

18. 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.

19. 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.

20. Consolidation Workpaper--20X2
Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Retained Earnings,
January 1 420, ,000
Investment in
Special Foods 284,000 (16) 28,000
Common Stock 500, ,000
Noncontrolling
Interest (17) ,000
(18)120, ,000
(18)256,000
(18)200, ,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.

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

22. Consolidated Net Income--20X2
Peerless’s separate income $160,000
Realization of deferred intercompany profit ,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 ,000
Consolidated net income, 20X2 $223,000

23. 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

24. 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

25. 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.

26. 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.

27. Consolidation Workpaper--20X1
Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Retained Earnings,
January 1 300, ,000
Investment in
Special Foods 256,000 (23) 16,000
Common Stock 500, ,000
Noncontrolling
Interest (24) ,400
(25)100, ,000
(25) 240,000
(25)200, ,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.

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

29. 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 ,600
Consolidated net income, 20X1 $177,600

30. 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

31. 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.

32. 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.

33. Consolidation Workpaper--20X2
Peerless Special Eliminations
Item Products Foods Debits Credits Consolidated
Retained Earnings,
January 1 420, ,000
Investment in
Special Foods 284,000 (29) 28,000
Common Stock 500, ,000
Noncontrolling
Interest (30) ,600
(31)120, ,000
(31)256,000
(31)200, ,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.

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

35. 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 ,000
Special Foods’ realized income $78,000
Peerless’s proportionate share x ,400
Consolidated net income, 20X2 $222,400

36. Chapter Seven
The End