Question

Q1 . Assume Parent Co. owns 100% of Sub Co. The following intercompany transactions occurred during the year: Parent loaned SAR 500 to Sub.

• Parent made a sale to Sub for SAR 400 cash. The inventory had originally cost Parent SAR 250. Sub then sold that same inventory to an outsider for SAR 500.

Required: What consolidation worksheet entries would you make?

Q2. Distinguish between an upstream sale of inventory and a downstream sale. Why is it important to know whether a sale is upstream or downstream?

Answer 1

Q1: the consolidation elimination entries are as following:

Loan from Parent a/c Dr	500
To Advance to Sub a/c		500
(Being inter company loan transaction eliminated)
Sales a/c (Parent) Dr	400
To Cost if Goods sold (Sub)		400
(Being Inter company sale transaction eliminated)

Q2:

• Downstream sales occurs when the parent makes sales of inventory, land or lends any money to its subsidiary. Similarly Upstream sales occurs when subsidiary makes any sale of such items to its parent.
• In case of downstream sales, therefore no much complications in computing shares of profits realised from intercompany transactions for elimination. However in case of upstream sales, complications arise especially when there are profits included in sales made which have share of non-controlling shareholders.