Prepared by: HAZEL JADE E.
VILLAMAR__
E-mail Address: [email protected]________
Central Luzon State University
Science City of Muñoz 3120
Nueva Ecija, Philippines
Instructional Module for the Course
ACCTG 2215 / Accounting for Business Combinations
Module 2
Topic 4 (Upstream Sale of Inventory)
Overview
This course covers the concepts and application of the different standards
related to accounting for business combination. It involves techniques and
methodologies on how to deal properly with issues and problems involving
business combination that are likely to be encountered in practice and in the
National CPA Licensure Examination.
I. Objectives
At the end of the module, the following are expected to:
A. To understand the concept of intercompany transactions;
B. Identify the effect of intercompany transactions to financial statements; and
C. Compute the effect of intercompany sales.
ACCTG 2215 / Accounting for Business Combinations
UPSTREAM SALE OF INVENTORY
Unrealized Intercompany Profit in Ending Inventories
Assume that on March 1, 2020, Sub Company (an 80% owned subsidiary) sold
merchandise to Parent Company costing P7,500 for P10,000 or at a gross profit of 25%, out
of which P5,000 remained unsold by Parent Company on December 31, 2020. The
inventories sold to outsiders by Parent Company were marked up at 20% on cost. The
following entries were recorded by each company:
Books of Sub Company:
03/01/2020 Cash 10,000
Sales 10,000
To record the sale to Parent Company.
Cost of goods sold 7,500
Inventory 7,500
To record the cost of inventory sold.
Books of Parent Company:
03/01/2020 Inventory 10,000
Cash 10,000
To record the purchase from Sub.
12/31/2020 Cash 6,000
Sales 6,000
To record the sale to outsiders.
Cost of goods sold 5,000
Inventory 5,000
To record the cost of goods sold.
Selling Price Cost Gross Profit (25%)
Beginning Inventory - - -
Add: Sales P 10,000 P 7,500 P 2,500
Totals P 10,000 P 7,500 P 2,500
Less: Ending Inventory 5,000 3,750 *1,250
Cost of goods sold P 5,000 **P 3,750 P 1,250
*The unrealized profit on ending inventory if P1,250.
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ACCTG 2215 / Accounting for Business Combinations
Parent Sub Unadjusted Consolidated
Company Company Balances Balances
Sales P 10,000 P 6,000 P 16,000 P 6,000
COGS 7,500 5,000 12,500 **3,750
Gross profit P 2,500 P 1,000 P 3,500 P 2,250
Based on the foregoing analysis, the working paper elimination entries are required
for Sub’s intercompany sales of merchandise to Parent for the year ended December 31,
2020:
Sales 10,000
Cost of goods sold 10,000
To eliminate intercompany sale of inventory.
Cost of goods sold 1,250
Inventory 1,250
To eliminate unrealized inventory profit.
Proof:
Assume that Parent Company sold all the inventory during the period, the following
is the expected consolidated income of the two companies:
Sub Parent Unadjusted Consolidated
Company Company Balances Balances
Sales P 10,000 P 12,000 P 22,000 P 12,000
COGS 7,500 10,000 17,500 7,500
Gross profit P 2,500 P 2,000 P 4,500 P 4,500
Since Parent Company was able to sell only P5,000 worth of its inventories,
or 50% of the available inventories, the Gross Profit for the period is also 50%
of the expected consolidated gross profit which is equal to P2,250.
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ACCTG 2215 / Accounting for Business Combinations
NCI in Net Income of Subsidiary
The unrealized intercompany profit of P1,250 is attributable to Sub Company, the
seller of the merchandise and must be considered in the computation of the NCI in Sub’s
net income for the year ended December 31, 2020. The computation is as follows:
Sub’s net income from own operations (assumed) 24,000
Unrealized intercompany profit on ending inventory (1,250)
Sub’s realized net income 22,750
NCI in net income of subsidiary (22,750 x 20%) 4,550
Consolidated Net Income
Consolidated net income on December 31, 2020 may be computed and allocated as
follows:
Parent’s net income from own operations (assumed) 50,000
Sub’s realized net income 22,750
Consolidated net income 72,750
Attributable to NCI 4,550
Attributable to parent shareholders 68,200
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ACCTG 2215 / Accounting for Business Combinations
REFERENCES:
Advanced Accounting Principles and Procedural Applications Volume 2 by Pedro P. Guerrero
and Jose F. Peralta
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