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Yap - ACP312 - ULOb - in A Nutshell

1. Consolidation requires eliminating intercompany transactions between a parent and subsidiary, such as intercompany sales of inventory, to accurately reflect the financial position as a single entity. 2. Intercompany sales can include unrealized profits or losses that must be eliminated to avoid overstating inventory and comprehensive income in consolidated financial statements. 3. The type of intercompany sale (upstream or downstream) determines whether non-controlling interest is affected when adjusting for unrealized profits or losses in the consolidation process.

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Junzen Ralph Yap
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34 views1 page

Yap - ACP312 - ULOb - in A Nutshell

1. Consolidation requires eliminating intercompany transactions between a parent and subsidiary, such as intercompany sales of inventory, to accurately reflect the financial position as a single entity. 2. Intercompany sales can include unrealized profits or losses that must be eliminated to avoid overstating inventory and comprehensive income in consolidated financial statements. 3. The type of intercompany sale (upstream or downstream) determines whether non-controlling interest is affected when adjusting for unrealized profits or losses in the consolidation process.

Uploaded by

Junzen Ralph Yap
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Jun Zen Ralph V.

Yap BSA – 3rd Year

In a Nutshell

Activity 1. We have discussed the consolidation procedures of intercompany sale of inventories.


Based from the definition of the most essential terms in the course and the learning exercises
that you have done, please feel free to write your arguments or lessons learned below. I have
indicated my arguments or lessons learned.

1. Consolidation requires some transactions between the parent and subsidiary to be


eliminated as such for intercompany sale of inventory. It is important to identify if the
transaction is downstream or upstream sale since the seller would be the one to adjust
its comprehensive income for any intercompany profits. (Example)
2. There are intercompany transactions occurred between parent and subsidiary that would
result profits and losses on their part. One of the examples of intercompany transactions
is intercompany sales of inventory. This transaction includes the unrealized profits or
losses of the selling affiliate that would result in overstatement of inventory of the buying
affiliate at the end of the accounting period. Since the consolidated financial statements
are prepared in order to show the financial position and operations of the parent and the
subsidiary as if they were single entity, the unrealized profits or losses should be
eliminated to bring back the affected accounts at its cost.
3. Failure to eliminate the unrealized profits or losses would result to overstatement of the
consolidated statements of comprehensive income and financial position.
4. The unrealized profits or losses can be computed using the gross profit based on sales
of the selling affiliate multiplied by the ending inventory of the buying affiliate.
5. When intercompany sales include unrealized profits or losses, working paper
eliminations must be made. The first elimination to do is the intercompany sales and
related intercompany cost of goods sold by the selling affiliate. The second is unrealized
profit or losses included in the inventories of the buying affiliate.
6. There are two types of intercompany sale; (1) upstream intercompany sale and (2)
downstream intercompany sales. The first type relates to the intercompany sales from
subsidiaries to the parent company. The second relates to the intercompany sale that
the parent is the selling affiliate and the buying is the subsidiary.
7. It is important to identify whether an intercompany sale is downstream or upstream
because only upstream sales affect the non-controlling interest. The selling affiliate is the
one that recognizes the profit from the intercompany sale if the inventories bought are
sold to the outsiders.
8. In an upstream intercompany sale, the subsidiary recognizes the profit. NCI is affected
because the profit pertains to both the owners of the parent (controlling interest in the
subsidiary) and the NCI (non-controlling interest of the subsidiary).
9. In a downstream intercompany sale, the parent recognizes the profit. NCI is not affected
because the profit pertains solely to the owners of the parent.
10. Unrealized profits from upstream transactions are adjusted to the subsidiary’s net assets
while unrealized profits from downstream transactions are adjusted to the parent’s
retained earnings.

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