Question

Provide the elimination of intercompany inventory transactions procedures.

What would be the elimination entries that are necessary to the distinction between upstream and downstream transactions.

Answer 1

Parent and Subsidiary transactionsshould are viewed asinternal transactions of a single economic activity.Effects ofintercompany transactions should be eliminated from consolidatedfinancial statements.In case of transfer of costs an eliminatingentry is made to remove revenue from intercorporate sale andrelated cost of goods sold recorded by the seller howeverconsolidated net income is not affected.On the consolidationworksheet all intercompany sales or purchases of the inventory inthe year of sale is eliminated.In case of transfers at profit orloss if companies use different approaches in setting intercorporate transfer prices then effects of such sale must be removedfrom consolidated statements.Also unrealised inventory gains whichis still overstated by the amount of gain in inventory that isstill unsold must be eliminated by debiting cost of goods sold andcrediting inventory.

Upstream transactions:

   When inventory isnot resold to a non affiliate befor the end of period work papereliminating entries are different since the unrealised intercompanyprofit is apportioned to both the contolling and non controllinginterests.Any unrealised gain if transfer is upstream belongs tothe subsidiary.

Downstream:For consolidation purpose profits recorded on anintercorporate inventory sale are recognised in the period in whichthe inventory is resold to an unrelated party.Until the point ofsale all intercorporate profits must be deffered. While selling aninventory item to an affiliate three situations can take place itemresold to a non affiliate during the a)same period b)next periodand c)two or more periods by purchasing affiliate.If transfer is down stream then unrealised gainbelong to the parents.