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Topsya
Member
I am actually having trouble with that topic myself.
Here is how I would solve this (I might be wrong though)
Topsya
Member
I am actually having trouble with that topic myself.
Here is how I would solve this (I might be wrong though)
1. Reverse the sale.
Dr Sale $500,000
Cr COGS $500,000
We reversing it because this Sale should never been recorded in the first place. It is
simply a transfer of assets within a company.
2. Since you recorded a sale originally, COGS has changed (increased). When the item
was in the possession of the parent, its COGS was 100%, and now its 125%. Same
item though. So you need to bring it back to what it was originally.
Dr. COGS $80,000
Cr. EI $80,000
Do you know the answer? Please let me know.
Thanks,
October 9, 2013 at 6:55 pm #458344
barronn30
Participant
Hmm, I believe #1 is correct but I am not sure about #2.
Im having trouble with the logic but from my notes, it seems like Cost markup x Cost
= Sale price.
So it may be 1.25 x Cost = 500,000. Cost = 400,000.
So #2 is:
Dr COGS 100,000
Cr. Ending inv 100,000
(not sure if this is correct either), and then I have no clue on how to find the
additional entries for removing unrealized profits.
October 9, 2013 at 6:55 pm #458482
barronn30
Participant
Hmm, I believe #1 is correct but I am not sure about #2.
Im having trouble with the logic but from my notes, it seems like Cost markup x Cost
= Sale price.
So it may be 1.25 x Cost = 500,000. Cost = 400,000.
So #2 is:
Dr COGS 100,000
Cr. Ending inv 100,000
(not sure if this is correct either), and then I have no clue on how to find the
additional entries for removing unrealized profits.
October 9, 2013 at 7:05 pm #458346
lleon
Member
As I understand it (hopefully someone else can confirm):
The profit that would need to be eliminated is the profit recognized by the parent on
its sale to the subsidiary since they sold the goods at a markup. However, you only
need to eliminate the profit of the inventory still on hand.
So, on the sale of 500k, company A recorded:
Dr. Cash 500k
Cr. Sales 500k
Dr. COGS 400k
Cr. Inventory 400k
Company B recorded:
Dr. Inventory 500k
Cr. Cash 500k.
Therefore, company A has gross profit of 100k on their books. Upon consolidation,
company B has 100k in ending inventory. That represents 20% of the inventory
company B originally recorded (100/500). Therefore, as part of your eliminating
entries, you would have to eliminate 20% of the 100k profit originally recognized by
company A.
lleon
Member
As I understand it (hopefully someone else can confirm):
The profit that would need to be eliminated is the profit recognized by the parent on
its sale to the subsidiary since they sold the goods at a markup. However, you only
need to eliminate the profit of the inventory still on hand.
So, on the sale of 500k, company A recorded:
Dr. Cash 500k
Cr. Sales 500k
Dr. COGS 400k
Cr. Inventory 400k
Company B recorded:
Dr. Inventory 500k
Cr. Cash 500k.
Therefore, company A has gross profit of 100k on their books. Upon consolidation,
company B has 100k in ending inventory. That represents 20% of the inventory
company B originally recorded (100/500). Therefore, as part of your eliminating
entries, you would have to eliminate 20% of the 100k profit originally recognized by
company A.
Eliminating entry to remove sale:
Dr. Sales 500k
Cr. COGS 500k
Entry to remove gross profit:
lleon
Member
Per my post above and to more directly answer the original question, the profit
would be 100k (inter-company). 80k has been realized and 20k is unrealized and
must be removed, per my understanding.
I arrived at the 20% unrealized because of the ending inventory on company Bs
books, which is 100k. They recorded the inventory at 500k, so 100k/500k = 20% still
on the books, which would mean 20% of the inter-company profit is included in that
inventory. The rest of the inventory has presumably been sold, thus realizing the
profit from the inter-company sale.
October 9, 2013 at 7:11 pm #458486
lleon
Member
Per my post above and to more directly answer the original question, the profit
would be 100k (inter-company). 80k has been realized and 20k is unrealized and
must be removed, per my understanding.
I arrived at the 20% unrealized because of the ending inventory on company Bs
books, which is 100k. They recorded the inventory at 500k, so 100k/500k = 20% still
on the books, which would mean 20% of the inter-company profit is included in that
inventory. The rest of the inventory has presumably been sold, thus realizing the
profit from the inter-company sale.