Sale of stock by parent to subsidiary and subsidiary to parent in consolidation

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 parent 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 cost 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 have 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, stock