Consolidated Financials (Inter-company Transactions)

John,

I was doing a practice question on the BPP revision kit, the question was the following: Swing purchased 80% of Cat’s equity on 1 Jan 20X8 for $120,000 when Cat’s retained earnings were $50,000. The fair value of the non-controlling interest on that date was $40,000. During that year, Swing sold goods which cost $80,000 to Cat, at an invoiced cost of $100,000. Cat had 50% of the goods still in inventories at year end.

They then give us the separate financials. I got most of the question right, including the part where I take only 50% of the unrealized profit since they must have sold 50% of the inventory to outsiders. My problem arose when I calculated Trade receivables and payables. In your lecture we adjusted for the inter-company transaction by subtracting both the payables and the receivables by the $ amount of inventory bought/sold respectively. In this example the answer does not adjust for the inter-company transaction, they just simply ignore it and add up trade receivables and payables as we would current assets and liabilities. Is there an exception to the rule that I am not aware of?

Thanks for the help!