Advanced Accounting - Chapter 5

Entry G _____ gross profit

defers

Because the GP rate was 37.5%, the retained inventory is stated at a value ______ more than its original cost (remember that $20,000 of inventory was still retained)

the inventory is now stated $7,500 higher than its original cost ($20K remaining inventory x 37.5% = $7,500 in unrealized GP that remains in inventory)

TI stands for

transferred Inventory

What does this entry do? CONSOLIDATION ENTRY G (debit) COGS (ending inventory component) ...$30K (credit) Inventory (balance sheet account) $30K

Reduces the CI (Consolidated Inventory) account to its originaly $50,000 historical cost.. Furthermore, increasing COGS by $30K effectively removes the unrealized amount from recognized gross profit. IT REMOVES GP FROM THE CONSOLIDATED INVENTORY BALANCE IN THE YEAR OF TRANSFER

This entry does what for gross profit in the second year?: (debit) Retained Earnings (beg. balance of seller) ...7,500 (credit) COGS (beg inventory component) ..7,500

Reducing Cost of Goods Sold (beginning inventory) through this worksheet entry increases the gross profit reported for this second year.

Entry G does what?

Removes the gross profit from the intra-entity transaction for the "seller"

What is the one specific situation that the consolidation entry to recognize intra-entity beginning inventory gross profit differs from entry *G?

If (1) original transfer is downstream (intra-entity sales made by the parent) and (2) the parent applies the equity method for internal accounting purposes

What does the below entry do with respect to gross profit in the 2nd year? Consolidation Entry *G - Year Following Transfer (Year 2) Journal Entry for the same situation above (debit) Retained Earnings (beginning balance of seller) ....$7,500 (credit) COGS (beginning inventory component

it increases gross profit in the second year

To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). From the viewpoint of the consolidated company, it has now earned the profit on the $60,000 portion of the intra-entity sale and ______

need not make an adjustment for consolidation purposes

consolidated investment in bottom (downstream)

parent balance - elimination of intra-entity dividend - elimination of intra-entity income after *G elimination

consolidated cash and receivables (downstream)

parent's balance + subsidiary's balance - elimination of intra-entity receivable/payable balances

consolidated dividends declared (downstream)

parent's dividends + subsidiary's dividends - elimination of intra-entity dividend - non-controlling interest share of dividend

The entry to remove unrealized gross profit created by intra-entity sale removes the unrealized amount from

recognized gross profit

Entry *G ____ gross profit

recognizes

Correcting the ending $30K overstatement in Ending Inventory only requires __________; however before decreasing gross profit, the accounts affected by the incomplete earnings should be ______

reducing the asset; identified

Why does the G* begin by decreasing the seller's beginning Retained Earnings account? Despite the consolidation entries in Year 1, the $7,500 gross profit........

remained on the company's separate books and was closed to Retained Earnings at the end of the period

Regardless of the method used for this pricing decision, intra-entity profits that remain unrealized at year-end must be

removed in arriving at consolidated figures

consolidated sales (downstream)

sales of parent + sales of subsidiary -intra entity transfer sales

The elimination entray "*G" means

the *G indicates that a previous year transfer created the intra-entity profits

Intra-entity profits ultimately are realized by subsequently consuming or reselling these goods. Therefore, only the transferred inventory still held at year-end continues to be recorded in the separate statements at a value more than the historical cost. For this reason, the elimination of unrealized gross profit (Entry G; debit COGS, credit Inventory for the amount of gross profit) is based not on total intra-entity sales but only on _________

the amount of transferred merchandise retained within the business at the end of the year.

the elimination of unrealized gross profit (Entry G ) is based not on _____, but only on the amount of

the elimination of unrealized gross profit (Entry G ) is based not on total intra-entity sales but only on the amount of transferred merchandise retained within the business at the end of the year.

Despite the Entry TI (transferred inventory), the inflated ending inventory figure causes COGS to be too ____, and thus profits _____ by $30K

the inflated ending inventory figure causes COGS to be too low, and thus profits to be too high by $30K

If a transfer is downstream (the parent sells inventory to the subsidiary), a logical view would seem to be that the unrealized gross profit is that of ________. Why?

the parent company; Because the parent made the original sale; therefore, the GP is included in its financial records

Despite the elimination of sales and COGS _____________________ can still exist in the account records at year-end

unrealized gross profits created by such sales can still exist in the accounting records at year-end.

Recall that consolidation entries are never posted to the individual affiliate's books. Therefore, from a consolidated view, the buyer's COGS (through the beginning inventory component) and the seller's Retained Earnings accounts as of the beginning of Year contain the same _______, and both must be reduced via ___

unrealized profit; both must be reduced via entry *G

**How is the non-controlling interest's share of consolidated net income computed?

It's based on the reported income of the subsidiary after adjustment for any unrealized upstream gross profits

If Company A company acquired inventory at a cost of $50K, then sold it to Company Z for $80K, Company A, the $30K inflation created by the transfer price exists in two areas of the individual statements:

(1) ending inventory remains overstated by $30k (2) GP is artificially overstated by the same amount

Under the equity method, the parent's investment-related accounts are subjected to 1) 2) 3) 4)

(1) income accrual, (2) excess fair over book value amortization, (3) adjustments required by unrealized intra-entity gross profits, and (4) dividends.

INVESTMENT BALANCES-EQUITY METHOD - DOWNSTREAM SALES How do you get to Equity Earnings of Bottom Company in the first year (2014) 1) 2) 3) = 4) x __% 5) = 6) - 7) 8) - 9)

1) Bottom Co. reported income for 2014 2) Less "database" amortization 3) = Bottom Co adjusted 2014 net income 4) x Top's ownership pecentage 5) = Top's share of Bottom income 6) - Deferred profit from Top's 2014 downstream sales 7) = Equity earnings of bottom company, 2014 8) - Top's share of Bottom Co. dividends, 2014 (80%) 9) === Balance, 12/31/14

Unrealized Gross Profit - Year of Transfer (Year 1) 1) Despite the sales/purchases journal entry elimination (debit sales, credit COGS), what can still exist in the accounting records at year-end? 2) When do these profits occur? 3) Actual transfer prices are established in several ways, including

1) Unrealized gross profits created by such sales can still exist in the accounting records at year-end. 2) When merchandise is priced higher than HISTORICAL cost 3) including the normal sales price of the inventory, sales price less a specified discount, or at a predetermined markup above cost

To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). From the viewpoint of the consolidated company, it has now earned the profit on the $60,000 portion of the intra-entity sale and need not make an adjustment for consolidation purposes. Conversely, any gross profit recorded in connection with the $20,000 in merchandise that remains is still a component within Zirkin's Inventory account. Because the gross profit rate was _____________ (_____ gross profit / ______ transfer price)

37.5% ($30,000 GP / $80,000 Transfer Price)

What is the GP rate for $30K gross profit on $80K transfer price?

37.5% ($30K GP / $80K Transfer Price)

What is different about the 2nd year? What is added in?

After Step 5, you recognize the deferred gross profit from the first year before deferring the profit from Top's 2015 downstream sales

Whenever unrealized intra-entity profit is present in ending inventory, one further consolidation entry is eventually required. Although Entry G __________________ in the year of transfer, the $7,500 overstatement remains within the separate financial records of the buyer and seller.

Although Entry G (previous flashcard) removes the gross profit from the CONSOLIDATED inventory balances

Intra-Entity Beginning Inventory Profit Adjustment—Downstream Sales When Parent Uses Equity Method The worksheet elimination for intra-eneity sales/purchases (Hint: Entry _____)

Entry TI

Regarding the Top Company and Bottom Company, what would Bottom Co. reported income for 2014 LESS database amortization be?

Bottom Co's adjusted net income

After you remove Top Company's 2014 downstream sales, what does that equal?

Equity earnings in Bottom Company, 2014

Despite the TI entry (debit sales, credit COGS), the inflated ending inventory figure causes COGS to be too ____, and thus profits to be _____

COGS to be too LOW; Profits to be too HIGH

Unrealized Gross Profit - Year of Transfer (Year 1) Assume Arlington acquired or produced inventory at a cost of $50,000 and then sold it to Zirkin, an affiliated party, at the indicated $80,000 price. From a consolidated perspective, the inventory still has a historical cost of only $50,000. However, Zirkin's records now report it as an asset at the $80,000 transfer price. In addition, due to the markup, Arlington's records show a $30K GP from this intra-entity sale. 1) After the first TI journal entry (debit Sales, credit COGS), if all of the transferred inventory is retained by the business combination at the end of the year, the following worksheet entry must also be included to eliminate the effects of the SELLER'S gross profit that remains unrealized within the buyer's ending inventory:

CONSOLIDATION ENTRY G (debit) COGS (ending inventory component) ...$30K (credit) Inventory (balance sheet account) $30K

How would you record this $7,500 in unrealized GP that remains in inventory?

CONSOLIDATION ENTRY G - YEAR OF TRANSFER (YEAR 1) 25% OF INVENTORY REMAINS (REPLACES PREVIOUS ENTRY) (debit) COGS (ending inventory component) ...7,500 (credit) Inventory ....7,500 (To remove unrealized portion of intra-entity GP in year of transfer)

Regarding the solo situation for the different *G journal entry, what is that journal entry?

Consolidation Entry *G—Year Following Transfer (Year 2 (replaces previous Entry *G for downstream transfers when the equity method is used) (debit) Investment in Subsidiary ...7,500 (credit) COGS ...7,500

Markup on cost (MC) =

Gross Profit / COGS also = GPR / (1 - GPR)

GPR Formula =

Gross Profit / Sales

Conversely, any gross profit recorded in connection with the $20,000 in merchandise that remains is still a component within Zirkin's (the company that was originally transferred the $80k in inventory ($30K GP for Arlington))

INVENTORY ACCOUNT

How could you report the noncontrolling interest's share of Small's income? (hint: 2 ways) To illustrate, assume that Large Company owns 70 percent of the voting stock of Small Company. To avoid extraneous complications, assume that no amortization expense resulted from this acquisition. Assume further that Large reports current net income (from separate operations) of $500,000 while Small earns $100,000. During the current period, intra-entity transfers of $200,000 occur with a total markup of $90,000. At the end of the year, an unrealized intra-entity gross profit of $40,000 remains within the inventory accounts.

Either as $30K (30% of the $100k earnings of the subsidiary) or $18,000 (30% of reported income after that figure is reduced by the $40,000 unrealized gross profit)

To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). From the viewpoint of the consolidated company, it has now earned the profit on the $60,000 portion of the intra-entity sale and need not make an adjustment for consolidation purposes. Conversely, any gross profit recorded in connection with the $20,000 in merchandise that remains is still a component within Zirkin's Inventory account. Because the gross profit rate was 37.5% ($30K GP / $80K Transfer Price), this retained inventory is stated at a value $7,500 more than its original cost ($20,000 retained inventory x 37.5% GPR) What is the required reduction journal entry?

JOURNAL ENTRY G (REMOVE GP (debit) COGS (ending inventory component) ...$7,500 (credit) Inventory (balance sheet account) $7,500

Only the transferred inventory still held at year-end continues to be recorded in the separate statements at this value:

a value more than the historical cost

For consolidation purposes, the gross profit on the transfer is recognized in the period in which the items are

actually sold to outside parties

consolidated operating expenses (downstream)

add parent and subsidiary balances - recognition of amortization expense for current year on excess fair value allocated to "database"

an intra-entity transfer is merely the internal movement of ______, an event that creates no ____

an intra-entity transfer is merely the internal movement of inventory, an event that creates no net change in the financial position of the business combination taken as a whole

Even after removing the unrealized portion of intra-entity gross profit in the year of transfer.... when referring again to Arlington's sale of inventory to Zirkin, the $7,500 unrealized gross profit is still in Zirkin's Inventory account at which point in time?

at the start of the subsequent year; Once again, the overstatement is removed within the consolidated process, but this time from beginning inventory balance

Despite the internal information benefits of accounting for the transaction between a business combination where the two separate companies retain their legal identities as separate operating centers, when inventory sales occur between the two entities.... neither a

neither a sale nor a purchase has occurred

assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). From the viewpoint of the consolidated company, it has now ....

earned the profit on the $60,000 portion of the intra-entity sale and need not make an adjustment for consolidation purposes.

As a result of no net change in the financial position of the business combination taken as a whole, the recorded effects of inventory transfers are

eliminated so that consolidated statements reflect only transactions with outside parties

When do unrealized gross profits created by such sales can still exist in the accounting records at year-end occur as a result of the merchandise being priced above

historical cost

Recall that consolidation entries are never posted to the

individual affiliate's books

consolidated land (downstream)

parent balance + subsidiary balance

consolidated plant assets (net)

parent balance + subsidiary balance

consolidated inventory (downstream)

parent balance + subsidiary balance - removal of gross profit from beginning figures so it can be recognized in current period. downstream sales attributed to parent

Unrealized Gross Profit—Year Following Transfer (Year 2) After Entry G, which removes the gross profit from the consolidated inventory balances in the year of transfer, you have to remove the $7,500 overstatement, which remains within the separate financial records of the buyer and the seller. Referring again to Arlington's sale of inventory to Zirkin, the $7,500 unrealized gross profit is still in Zirkin's Inventory account at the start of the subsequent year. Once again, the overstatement is removed within the consolidation process but this time from the beginning inventory balance, which appears in the _______ only as a _____

which appears in the financial statements only as a positive component of COGS

By doing the required reduction (Entry G), you are not recording ________ but only the ______

you are not recording the entire $30K shown previously but only the $7.5K unrealized GP that remains in inventory

consolidated equity earnings of bottom (downstream)

None. It's eliminated via *G entry

In producing consolidated financial statements, what is the recorded effect of intra-entity inventory transactions?

The recorded effects of transfers are eliminated so that consolidated statements reflect only transactions with outside parties

Unrealized Gross Profit—Effect on Noncontrolling Interest 1) What is the consolidated net income prior to the reduction? To illustrate, assume that Large Company owns 70 percent of the voting stock of Small Company. To avoid extraneous complications, assume that no amortization expense resulted from this acquisition. Assume further that Large reports current net income (from separate operations) of $500,000 while Small earns $100,000. During the current period, intra-entity transfers of $200,000 occur with a total markup of $90,000. At the end of the year, an unrealized intra-entity gross profit of $40,000 remains within the inventory accounts.

$560,000 (The two income balances less the unrealized gross profit; $500,000 + $100,000 - $40,000)

Regarding the example below, if the $40,000 unrealized gross profit results from an upstream sale from subsidiary to parent, only ______ of Small's $100,000 reported income actually has been earned by the end of the year. To illustrate, assume that Large Company owns 70 percent of the voting stock of Small Company. To avoid extraneous complications, assume that no amortization expense resulted from this acquisition. Assume further that Large reports current net income (from separate operations) of $500,000 while Small earns $100,000. During the current period, intra-entity transfers of $200,000 occur with a total markup of $90,000. At the end of the year, an unrealized intra-entity gross profit of $40,000 remains within the inventory accounts.

$60,000 ($100K of Small's income - $40K of the unrealized GP from the upstream intra-entity transfer)

To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the other $20,000 (for resale in the following year). From the viewpoint of the consolidated company, it has now earned the profit on the $60,000 portion of the intra-entity sale and need not make an adjustment for consolidation purposes. Conversely, any gross profit recorded in connection with the $20,000 in merchandise that remains is still a component within Zirkin's Inventory account. Because the gross profit rate was 37.5% ($30K GP / $80K Transfer Price), this retained inventory is stated at a value _________ more than its original cost.

$7,500 ($20,000 inventory retained x 37.5% GPR)

Entry to remove unrealized gross profit created by intra-entity sale

(debit) COGS (ending inventory component) ... $30K (credit) Inventory (balance sheet account) ... $30K

How would you remove $4,000 of intra-entity gross profit carried over in beginning inventory from a 2014 intra-entity downstream transfer if the parent utilized the equity method? Assume: Transfer Price: $80,000 Historical Cost: $60,000 Inventory Remaining at year-end (at transfer price): $16,000

(debit) Investment in Bottom ........4,000 (credit) COGS ...4,000 =(80,000-60,000)

The Consolidation Entry *G - Year Following Transfer (Year 2) to remove the unrealized GP from beginning figures so that it is recognized currently in the period in which the earnings process is completed

(debit) Retained Earnings (beg. balance of seller) ...7,500 (credit) COGS (beg inventory component) ..7,500

Consolidation Entry *G - Year Following Transfer (Year 2) Journal Entry for the same situation above

(debit) Retained Earnings (beginning balance of seller) ....$7,500 (credit) COGS (beginning inventory component

To remove unrealized gross profit from beginning figures so that it is recognized currently in the period in which the earning process is completed

(debit) Retained Earnings (beginning balance of seller) ......7,500 (credit) COGS (beginning inventory component) ...7,500

In the preparation of consolidated financial statements, this elimination must be made for all intra-entity inventory transfers

(debit) Sales ... (credit) COGS (purchases component) for the value of the transfer

the following consolidation worksheet entry is then necessary to remove the resulting balances from the externally reported figures (assume Arlington Company makes an $80K inventory sale to Zirkin Company, an affiliated party with a business combination)

(debit) Sales ... $80K (credit) COGS (purchases component) ... $80K (To eliminate effects of intra-entity transfer of inventory; labeled TI in reference to the transferred inventory)

For consolidation purposes, the unrealized portion of the intra-entity gross profit must be adjusted in two successive years in what way?

(from ending inventory in the year of transfer and from beginning inventory of the next period).

1) journal entry to remove the effects of the actual intra-entity transfer for a sale valued at $80,000 2) Does this entry have to be made for all intra-entity transfers?? 3) How about if the transfer is upstream or downstream? Does this journal entry still have to be done? 4) when doing this journal entry (1), does gross profit included in the full transfer price affect this sales/purchases journal entry elimination?

1) (debit) SALES .... 80,000 (credit) COGS .... 80,000 2) YES 3) YES 4) No, it does not.

Unrealized Gross Profit - Year of Transfer (Year 1) Assume Arlington acquired or produced inventory at a cost of $50,000 and then sold it to Zirkin, an affiliated party, at the indicated $80,000 price. From a consolidated perspective, the inventory still has a historical cost of only $50,000. However, Zirkin's records now report it as an asset at the $80,000 transfer price. In addition, due to the markup, Arlington's records show a $30K GP from this intra-entity sale. 1) B/c the transaction did not occur with an outside party, how would this profit be recognized on Arlington's books? 2) Although the earlier consolidation entry (debit sales, credit COGS) eliminated sale/purchase figures, the $30K inflation created by the transfer price still exists in two areas of the individual statements: 3) What would the effect of correcting the inventory have? 4) before decreasing gross profit, the accounts affected by the incomplete earnings process should be .... ; 5) The ending inventory total serves as a negative component within the _______ computation; it represents the portion of inventory that was ____. Thus, the $30K overstatement of the inventory that is still held incorrectly ____ this expense (the inventory that was sold)

1) Because the transaction did not occur with an outside party, recognition of this profit is not appropriate for the combination as a whole. 2) Ending inventory remains overstated by $30K and GP is artificially overstated by this same amount 3) it would only reduce the asset 4) identified 5) COGS computation; it represents the portion of inventory that was not sold. Thus, the $30K overstatement of the inventory that is still held incorrectly decreases this expense (the inventory that was sold)

The Development of Consolidated Totals The following summarizes the effects of intra-entity inventory transfers on consolidated totals. 1) Revenues 2) COGS 3) Net Income Attributable to the Noncontrolling Interest 4) Retained Earnings at the Beginning of the Year 5) Inventory 6) Noncontrolling interest in subsidiary at End of Year

1) Revenues - Parent and subsidiary balances are combined, but all intra-entity transfers are them removed 2) COGS - Parent and subsidiary balances are combined, but all intra-entity transfers are removed. The resulting total is decreased by any beginning unrealized gross profit (thus raising net income) and increased by any ending unrealized gross profit (reducing net income) 3) Net Income Attributable to the Noncontrolling Interest - The subsidiary's reported net income is adjusted for any excess acquisition-date-fair-value amortizations and the effects of unrealized gross profits on upstream transfers (but not downstream transfers) and then multiplied by the percentage of ownership 4) Retained Earnings at the Beginning of the Year - As discussed in previous chapters, if the equity method is applied, the parent's balance mirrors the consolidated total. When any other method is used, the parent's beginning Retained Earnings must be converted to the equity method by Entry *C. Accruals for this purpose are based on the income actually earned by the subsidiary in previous years (reported income adjusted for any unrealized upstream gross profits) 5) Inventory - Parent and subsidiary balances are combined. Any unrealized gross profit remaining at the end of the current year is removed to adjust the reported balance to historical cost 6) Noncontrolling interest in subsidiary at End of Year - The final total begins with the noncontrolling interest at the beginning of the year. This figure is based on the subsidiary's book value on that date PLUS its share of any unamortized acquisitiondate excess fair value LESS any unrealized gross profits on upstream sales. The beginning balance is updated by adding the portion of the subsidiary's income assigned to these outside owners (as described above) and SUBTRACTING the noncontrolling interest's share of subsidiary dividends.

To summarize, for intra-entity beginning inventory profits resulting from downstream transfers when the parent applies the equity method: 1) The parent's beginning retained earnings reflect the consolidated balance from application of the equity method and need no ___. 2) The parent's Investment in Subsidiary account as of the beginning of Year 2 contains a credit from the deferral of ___ 3) Worksheet Entry *G debits the Investment account and credits Cost of Goods Sold, effectively recognizing the profit in the year of sale to outsiders.

1) adjustment 2) Year 1 intra-entity downstream profits. 3)the profit in the year of sale to outsiders.

To summarize, for intra-entity beginning inventory profits resulting from downstream transfers when the parent applies the equity method: 1) The parent's beginning retained earnings reflect the ______ from application of the equity method and need no adjustment. 2) The parent's Investment in Subsidiary account as of the beginning of Year 2 contains a credit from the deferral of _________ 3) Worksheet Entry *G debits the Investment account and credits Cost of Goods Sold, effectively recognizing ________

1) consolidated balance 2) Year 1 intra-entity downstream profits. 3)

1) If a transfer is downstream, how does this affect the subsidiary's income? 2) If a transfer is downstream, what justification exists for adjusting the non-controlling interest to reflect the deferral of unrealized gross profit?

1) it doesn't. 2) There is no justification because the subsidiary's income is unaffected

What is bottom co's adjusted 2014 net income x Top's ownership percentage equal to?

Top's share of Bottom Income

______________________ continues to be recorded in the separate statements at a value more than the historical cost

ONLY the transferred inventory still held at year end

What does the entry to remove unrealized gross profit created by intra-entity sale do?

It reduces the consolidated Inventory account to its original $50K historical cost; furthermore, increasing COGS by $30K effectively removes the unrealized amount from recognized GP

retained earnings (downstream)

Just Parent's retained earnings You eliminate the subsidiary's stockholders' equity accounts along with recognition of the noncontrolling interest as of January 1.

Although the noncontrolling interest figure is based here on the subsidiary's reported income adjusted for the effects of upstream intra-entity transfers, does GAAP require this treatment?

No

What does elimination entry *G mean?

The asterisk indicates that a previous year transfer created the intra-entity gross profits

The ending inventory total serves as a ____________ within the COGS computation; it represents the portion of acquired inventory that was _____ -- therefore, the $30K overstatement of the inventory that is still held incorrectly _____ the inventory that was sold

The ending inventory total serves as a NEGATIVE COMPONENT within the COGS computation; it represents the portion of acquired inventory that was NOT SOLD -- therefore, the $30K overstatement of the inventory that is still held incorrectly DECREASES the inventory that was sold

Intra-Entity Transfers 2014 and 2015 sheet (order)

Transfer Prices.....$80K (2014)....$100k (2015) Historical Cost.... $60K (2014) ...........$70K (2015) GP......= $20k ................. $30k Inventory Remaining at year-end (at transfer price)... $16k (2014) ...........$20k (2015) Gross Profit %-age 25%........... 30% Gross profit remaining in year-end inventory...$4k ....$6k

Intra-entity profit =

Transfer Price x GPR

When does the distinction between upstream and downstream transfer become significant?

When the parents uses the equity method and in the presence of a noncontrolling interest

After you arrive at Top's share of bottom income, what do you do?

You remove the deferred profit from Top Company's 2014 downstream sales

If a subsidiary sells inventory to the parent (an upstream transfer), the subsidiary's income remains unrealized from what perspective?

a consolidation perspective

Unrealized Gross Profit—Year Following Transfer (Year 2) After Entry G, which removes the gross profit from the consolidated inventory balances in the year of transfer, you have to remove the $7,500 overstatement, which remains within the separate financial records of the buyer and the seller. Referring again to Arlington's sale of inventory to Zirkin, the $7,500 unrealized gross profit is still in Zirkin's Inventory account at the start of the subsequent year. Once again, the overstatement is removed within the consolidation process but this time from the

beginning inventory balance

at the start of the subsequent year; Once again, the overstatement is removed within the consolidated process, but this time from ______

beginning inventory balance

Why debit the Investment in Subsidiary (and not the parent's beginning Retained Earnings) account in this situation? When the parent uses the equity method in its internal records, it recognizes _____

beginning inventory gross profits on its books (and defers intra-entity ending inventory gross profits) as part of its equity income accruals. Therefore, both the parent's net income and retained earnings appropriately reflect consolidated balances.

BEFORE the following consolidation worksheet entry is then necessary to remove the resulting balances from the externally reported figures (assume Arlington Company makes an $80K inventory sale to Zirkin Company, an affiliated party with a business combination) -- STEP 1

both companies record the transfer in their internal records as a normal sale/purchase

How are intra-entity profits ultimately realized?

by subsequently consuming or reselling purchased goods

To account for related companies as a single economic entity requires eliminating all

intra-entity sales/purchases balances

Any gross profit included in the transfer price _____________ this sales/purchases elimination. Why?

does not affect; Because the entire amount of the transfer occurred b/t related parties, the total effect must be removed in preparing consolidated statements

The total recorded (intra-entity) sales figure is deleted regardless of whether the transaction was _________ or ___________

downstream (from parent to subsidiary) upstream (from subsidiary to parent)