Question

"Consolidated Financial Statements – Intra-Entity Asset Transactions" The consolidation process required for the intra-entity transfer of depreciable assets is different from the requirements for inventory and land. Analyze the current consolidation process for intra-entity transfer of depreciable assets and suggest at least one (1) improvement to the process. Provide an example to support your recommendation. Assume that company P (parent) uses the equity method to account for its investment in company S (subsidiary). Company P purchases inventory items from company S. According to FASB’s guidance, the accountant must remove the inter-company profit from Company S’s net income. Evaluate the consolidation process for inventory transfers between the parent and subsidiary and describe the process for eliminating profit from the non-controlling interest. Determine if the process permanently eliminates the profit from the non-controlling interest or merely shifts the profit from one period to the next. Provide support for your rationale.

Answer 1

When we consolidate the financial statements of parent and subsidiary company than all the intercompany transactions needs to be eliminated.

When we do the consolidation than this means that both the entities are the same and as a general rule no one can earn profit from himself.

So if the inventory has been purchased by the parent company than this must has been recorded as a sale in the books of the subsidiary and hence now we need to remove the profit that has been recorded on this sale in the subsidiary books.

What has happened in Subsidiary books at the time of purchases made by the parent company.

Parent company Ac DR.

Cost of goods sold AC DR

To Sales    Ac CR

(Purchase price has been debited as the Cost and the sales are recorded)

So now since both of the entities are the one, there is no sale but a transfer only. The transfer will be considered as a transfer of goods from one place to another and hence the Gross profit needs to be deleted from the books.

This must be done in S books.

Sales Ac DR

To COGS ac CR

(The cost must has been credited with that part that has been equal to the profit earned so that the inventory level will now be same)

This is not a permanent solution but just correct the accounting for one period and need to be checked again at the end of next financial year.