Consolidation Inter company sale

SALE OF STOCK BY SUBSIDIARY TO PARENT

Stock is normally sold within a group at price above the original cost. 

Example1

Suppose A ltd which is a subsidiary of B Ltd (parent company) 

sold goods costing 10$ to parent for 15$ and these goods are in

 parents' books at year-end.

What happened	Actions required	Accounting entries
The balance sheet of parent shows stock at a price higher than cost price	The stock appearing in parents balance sheet current asset section shall be reversed by$5	Decrease stock  in the current asset  section  by$5
The subsidiary has recorded a profit of 5$ but in actual it is unrealized profit (should have to be reversed since both companies are consolidated	Unrealized gain recorded by subsidiary shall be reversed by $5 as it is not the actual gain	Decrease  consolidated  retained earnings  (CRE)  and  Non controlling  interest (NCI)

Point to ponder 

The above adjustments will be applied 
on the stock which is
 not sold yet and is present in the inventory however if the stock 
was sold outside by the parent than the profit earned on 
such stock is realized profit and will not be
 reversed

How to find markup and margin on remaining stock?

Markup(on cost price)	Margin(On selling price)
When finding markup always consider cost price=100$	When finding margin  always consider  selling  price=$100
If profit is 10%of cost price  it will be  equal to 10$	If the profit is 10%  of the selling price
And the total selling price  will be  110$	And the total  cost price will be  $90 (100-10)

Remaining stock: The amount of stock left in the parent of subsidiary
 inventory after making 
a sale to another company
 or a customer(individual)

Example 2:Parent acquired 80 percent shares of the subsidiary,
 in 2019 subsidiary sold to parent 
goods amounting $90,000 at a
 profit of 20% on cost (markup).
The parent still has 30 percent of this inventory in its stock 

Solution:-

First, we need to calculate unrealized gain earned by the subsidiary
 on making a sale to the parent 

Remaining stock=90000*0.3=27000   Stock sold=63000

Finding markup on remaining stock:-

Remaining stock*20/120=4500

FINAL ACCOUNTING ADJUSTMENT

REDUCE CRE=3600(80%)

REDUCE NCI=900(20%)

REDUCE CLOSING INVENTORY=4500

Normally no loss is made when a transaction is made 

between parent and subsidiary related to inventory.

Sale of inventory/stock from parent to subsidiary

What happened	Action required	Accounting entry
The balance sheet  (statement of  financial position) of subsidiary  shows stock  at a higher price	The stock  appearing in  the current asset  section of the  statement of  financial position  is reversed by$5	Reduce stock
Parent has  recorded a  profit of $5   (consider above  example 1)*	The unrealized  recorded by parent  amounting to $5  is reversed	Reduce CRE  only as in this  case subsidiary  remains un  effected

*if in the above example1 goods are sold by parent 

to subsidiary, figures remain the same.

EXAMPLE 3

Parent sold goods amounting to $90000 to subsidiary and

 earned a profit of 10%of costs of which 20% of goods are still 

Available in the closing inventory of subsidiary

 Pass the adjustments

Solution:

Reduce CRE BY 1636                                                

Remaining stock 90000*20%=18000 Profit on unsold inventory item(18000*10/110)=1636

REDUCE INVENTORY BY 1636

NO ADJUSTMENT TO BE MADE IN NCI     

Categories: CONSOLIDATION, inter company sales, subsidiary