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6 Intercompany Land and Profits
6 Intercompany Land and Profits
6 Intercompany Land and Profits
seda.oz@uwaterloo.ca
November 5, 2018 Copyright @ 2017 Seda Oz, PhD. All Rights Reserved 1
INTERCOMPANY
REVENUE & EXPENSES
Parents and subsidiaries frequently have sales and purchase
transactions between each other, or other transactions such as
intercompany rent, management fees, and interest.
When not paid, these transactions can give rise to
intercompany balances such as receivables and payables.
S P P+S
S Sales 1,000 P Sales 1,200 Sales 2,200
S Exp 400 P Exp 1,000 Exp 1,400
S NI 600 P NI 200 NI 800
Not eliminated
P Cons
P Sales 1200 Sales 1,200
Exp 400
S Exp 400 P consolidated NI 800
entity Eliminated
Sales & COGS
To eliminate:
P + S Adjust P Con
Sales
COGS
Want Sales1,200
Realize $600 held back by reducing
P Cons: Exp 400
the COGS cost (o/s inventory).
NI 800
Copyright @ 2017 Seda Oz, PhD. All Rights Reserved 15
COMPARISON YR 2
REALIZED
P+S not eliminated P Consolidated
Sales 1,200 Sales 1,200
COGS 1,000 COGS 400
NI 200 NI 800
To eliminate:
P + S Adjust P Cons
Sales 1,200 + 0 = 1,200
COGS 1,200 + 0 - 600 = 400
P P
S sells to P
UPSTREAM
S S P sells to S
DOWNSTREAM
Investment Income:
S’s Net income as reported $ 100,000
Less unrealized profit (after tax) 1,600
S’s adjusted NI 80%
98,400
P’s Share – 80% $ 78,720 20%
+ % of S’s
Adjusted NI
End of Yr
(Adjusted)
Investment Income
S’s Net income as reported 100,000
Plus unrealized profit (after tax) 1,600
S’s adjusted NI 80%
101,600
20%
P’s Share – 80% 81,280
NCI’s share – 20% 20,320
No adjustment
needed
P sells to S
Eliminate completely (always 100% for P)
Reduce Cons. Net Income (for current period) (for
profit in P’s income)
Reduce Cons Assets (S’s asset)
NCI is not affected
+ % of S’s
Adjusted NI
End of Yr
(Adjusted)
Investment Income
S’s Net income as reported
S’s adjusted NI
+ % of S’s
Adjusted NI
End of Yr
No adjustment
needed
I/S Gain
Inc tax exp
Need to add the Gain that have been holding back ($) to
Gain recognized ($) and add back in the income tax (no
longer need the Deferred Tax Asset)
Significant Influence 20 – 50 %