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Module 2-Topic 2

This instructional module covers accounting for business combinations, specifically downstream sales of inventory between a parent company and subsidiary. It defines a downstream intercompany sale as one from a parent to a subsidiary. Until the inventory is resold outside the group, any profit on an intercompany sale must be deferred. The module provides an example where a parent sells inventory to its 80%-owned subsidiary, which then resells it externally. It demonstrates the journal entries for both companies and explains that an elimination entry is needed to correctly state consolidated sales and cost of goods sold without double-counting the intercompany transaction.

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31 views4 pages

Module 2-Topic 2

This instructional module covers accounting for business combinations, specifically downstream sales of inventory between a parent company and subsidiary. It defines a downstream intercompany sale as one from a parent to a subsidiary. Until the inventory is resold outside the group, any profit on an intercompany sale must be deferred. The module provides an example where a parent sells inventory to its 80%-owned subsidiary, which then resells it externally. It demonstrates the journal entries for both companies and explains that an elimination entry is needed to correctly state consolidated sales and cost of goods sold without double-counting the intercompany transaction.

Uploaded by

MILBERT DE GRACIA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
You are on page 1/ 4

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 2 (Downstream Sale of Inventory I)
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

DOWNSTREAM SALE OF INVENTORY

Downstream intercompany sales of merchandise are those from a parent company to its
subsidiaries. For consolidation purposes, profits recorded on an intercompany inventory is
resold to outsiders. Until the point of resale, all intercompany profits must be deferred.
Consolidated net income must be based on the realized income of the selling affiliate.

If the intercompany sales of merchandise are made by the parent company or by a wholly
owned subsidiary, there is no effect on any NCI in net income or loss, because the selling
affiliate does not have NCI.

When a company sells merchandise to an affiliate, the merchandise may be resold to


outsiders during the same period or during the next period resulting to unrealized profit in
ending inventory.

Resale in the Year of Intercompany Sale

Assume that on March 1, 2020, Parent Company sold merchandise costing P7,500 to
Sub Company (80% owned by Parent) for P10,000 or at a gross profit rate of 25% of sales.
Assume further that on August 14, 2020, Sub Company sells the merchandise to outsiders
for P12,500. The following are the journal entries to be recorded by each companies:

Books of Parent Company:


03/01/2020 Cash 10,000
Sales 10,000
To record the sale of merchandise to Sub Company.

Cost of goods sold 7,500


Inventory 7,500
To record the cost of inventory sold.

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ACCTG 2215 / Accounting for Business Combinations

Books of Sub Company:


03/01/2020 Inventory 10,000
Cash 10,000
To record the purchase of inventory from Parent.

08/14/2020 Cash 12,500


Sales 12,500
To record the sale to outsiders.

Cost of goods sold 10,000


Inventory 10,000
To record the cost of inventory sold to outsiders.

Although the consolidated gross profit is correct even if no eliminations are made,
the totals for sales and cost of goods sold of both the parent and the subsidiary ae
overstated for the consolidated entity.

Parent Sub Unadjusted Consolidated


Company Company Balances Balances
Sale P 10,000 P 12,500 P 22,500 P 12,500
COGS 7,500 10,000 17,500 7,500
Gross Profit P 2,500 P 2,500 P 5,000 P 5,000

The amount of intercompany sale must be eliminated from both sales and COGS to
correctly state the consolidated totals. The elimination entry is therefore:
Sales 10,000
Cost of goods sold 10,000
To eliminate the intercompany sale of inventory.

Page 3 of 4
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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