1. Slide 10-1 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 INTERCOMPANY INVENTORY TRANSFERS

2. Slide 10-2 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Inventory Transfers: A Point to Remember l Intercompany Sales and Intercompany Cost of Sales accounts are eliminated only in years in which intercompany sales occur.

3. Slide 10-3 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Inventory Transfers: The Three Procedural Methods l MODULE 1: The Complete Equity Method: n Unrealized profit is deferred in the selling entity’s general ledger. l MODULE 2: The Partial Equity Method: n Unrealized profit is deferred in the consolidation process. l MODULE 3: The Cost Method: n Unrealized profit is deferred in the consolidation process.

4. Slide 10-4 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Miscellaneous: Lower-of-Cost-or-Market Adjustments lFor consolidated reporting purposes, the appropriate valuation of intercompany- acquired inventory is: n The lower of : s (1) the selling entity’s cost or (2) the market value.

5. Slide 10-5 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Miscellaneous: Partial Ownerships-- Reporting to the NCI Shareholders lUnder existing GAAP, a partially owned subsidiary: n Need not defer any of its unrealized intercompany gross profit in reporting to its NCI shareholders.

6. Slide 10-6 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Review Question #1 l For 2001, Paxco reported $60,000 of intercompany sales (25% markup on cost and fully paid for by Y/E) to Saxco, which reported $20,000 of intercompany acquired inventory at 12/31/01. The unrealized profit at 12/31/01 is: A. $ -0- B. $4,000 C. $5,000 D. $20,000 E. None of the above.

7. Slide 10-7 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Review Question #1--With Answer l For 2001, Paxco reported $60,000 of intercompany sales (25% markup on cost and fully paid for by Y/E) to Saxco, which reported $20,000 of intercompany acquired inventory at 12/31/01. The unrealized profit at 12/31/01 is: A. $ -0- B. $4,000 (20% of $20,000 Y/E inventory) C. $5,000 D. $20,000 E. None of the above.

8. Slide 10-8 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Review Question #2 l For 2001, Punco reported intercompany cost of sales of $1,600,000 (markup is 20% of transfer price ) to Sunco, which reported $600,000 of intercompany acquired inventory at 12/31/01. The unrealized profit at 12/31/01 is: A. $80,000 B. $96,000 C. $120,000 D. $150,000 E. None of the above.

9. Slide 10-9 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Review Question #2--With Answer l For 2001, Punco reported intercompany cost of sales of $1,600,000 (markup is 20% of transfer price ) to Sunco, which reported $600,000 of intercompany acquired inventory at 12/31/01. The unrealized profit at 12/31/01 is: A. $80,000 B. $96,000 C. $120,000 (20% of $600,000 Y/E inventory) D. $150,000 E. None of the above.

10. Slide 10-10 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Review Question #3 l For 2001, Salco (80% owned by Palco) reported $800,000 of intercompany sales (1/3 markup on cost) to Palco, which resold $700,000 of this inventory by 12/31/01. The unrealized profit at 12/31/01 is: A. $20,000 B. $25,000 C. $26,667 D. $33,333 E. None of the above.

11. Slide 10-11 Copyright © 2000 by Harcourt, Inc. All rights reserved. 10 Review Question #3--With Answer l For 2001, Salco (80% owned by Palco) reported $800,000 of intercompany sales (1/3 markup on cost) to Palco, which resold $700,000 of this inventory by 12/31/01. The unrealized profit at 12/31/01 is: A. $20,000 B. $25,000 (25% x $100,000 inventory on hand) C. $26,667 D. $33,333 E. None of the above.