Chapter 5

Intercompany Profit Transactions—Inventory

 Intercompany transaction: a transaction that occurs between two units of the same
entity.

 Intercompany Sales of Inventory

Profits on intercompany sales of inventory
- Recognized if goods have been resold to outsiders
- Deferred if the goods are still held in inventory
Previously deferred profits in beginning inventory are recognized in the period the
goods are sold. Assuming FIFO

Income Sharing with Downstream Sales – PARENT Makes Sale

Income Sharing with Upstream Sales – SUBSIDIARY Makes Sale

Summary of Journal Entries for Downstream Sales (PS)

a. Sales xxx
Cost of goods sold xxx
To eliminate intercompany sales and related cost of goods sold amounts.

b. Investment in S xxx
Cost of goods sold xxx
To adjust COGS and beginning investment balance for unrealized profits in the
beginning inventory.

c. Cost of goods sold xxx

Inventory xxx
To eliminate unrealized profits in the ending inventory and to increase the
consolidated COGS to the consolidated entity.

Summary of Journal Entries for Upstream Sales (SP)

a. Sales xxx
Cost of goods sold xxx
To eliminate reciprocal sales and cost of goods sold amounts.

b. Investment in S xxx
Noncontrolling interest xxx
Cost of goods sold xxx
 To adjust COGS and beginning investment balance for unrealized profits in the
beginning inventory.

c. Cost of goods sold xxx

Inventory xxx
To eliminate unrealized profits in the ending inventory and to increase COGS.