intercompany transactions

Yes! But try it this way - it's easier! Eliminate from revenue and from cost of sales the value of the intra-group trade - in your example, deduct 625 from revenue and 625 from cost of sales. This adjustment is simply a deduction when adding the figures through to arrive at the consolidated position.

Now, having eliminated the trade, think about whether group closing inventory is over-valued - by the unrealised profit. Again, in your case, the 125. This overvaluation of inventory should be adjusted, so we need to increase cost of sales and thereby reduce gross profit. Clearly, to achieve this, we should ADD the 125 to cost of sales.

Our only concern now is "Whose cost of sales?"

I ALWAYS ( unless the deal involves an Associate company ) make the adjustment in the retained earnings of the company which has made the sale - therefore the company which has recognised the profit.

In your example, the 125 would be added to Parent's cost of sales and therefore reduce the parent's retained earnings.

This is important! If it had been subsidiary selling to parent, the subsidiary's retained earnings would have been decreased. That will affect consolidated retained earnings AND it will affect your goodwill calculation.

i have a question.how is urp going to affect goodwill calculation even if the seller was sub.the only diff would that part of the urp would be deducted from nci depending on its %..and we calculate goodwill at acquisition and inter company transaction are adjusted for post acquisition only right.?then how?please elaborate
thanx

You're correct ciud3 - pup's don't affect goodwill. They are ( certainly at this level ) an adjustment to be made to post-acq profits and therefore feature in W3 ( cons ret ears ) and W4 ( nci )

I have a specific situation where the parent has sold an asset classified as asset under construction to the subsidiary in amount of 600 dollars. The asset is AUC so there is no amortization. The parent has issued an invoice to the subsidiary and recorded an income in the total amount of 600 dollars and VAT, no profit or loss on sale. The subsidiary has a liability for the sale made. How is this transaction eliminated in consolidation? Tnx

It depends where the subsidiary has posted the debit entry! On consolidation, the asset under construction needs to be eliminated as also does the current liability. That sorts out the statement of financial position For the statement of profit or loss, we need to reduce revenue but I don't know where the original debit has been posted in the subsidiary's records. Wherever that debit was posted, that's the account to credit in the combined statement of profit or loss Ok?

The parent has posted a debit on receivable, vat and revenue on credit as one je and a credit on auc and debit on cost of sales.profit on sale is 15 $(correction to the question above). The subsidiary has posted a debit on ppe and vat, credit on accounts payable. The subsidiary will amortize the asset. Is the same answer as above applicable? Tnx

Guessing vat rate of 20% and entries made, and saying that the asset is sold for 600 + vat, this is what I have: Dr Receivables 720 Cr Revenue 600 Cr Vat 120 Dr TNCA 600 Dr Vat 120 Cr Payables 720 To get rid of the intra group problem we need to: Dr Revenue 600 Cr TNCA 600 Dr Payables 720 Cr Receivables 720 Is that the same as your post?

Yes it is, with one more entry Dr AUC 585 Cr Cos 585 Profit on sale is 15

Other way round I believe - shouldn't that be Dr Cost of Sales and Cr Asset under Construction?

Hi Mike Let me summarize on the solution above : The parent ha as AUCs sold an asset classified to the subsidiary. To record the sale the parent should post the following : Dr Receivable 720 Cr Revenue 600 Cr VAT 120 Dr CoS 585 Cr AUC 585 The subsidiary has posted the following : Dr PPE 600 Dr VAT 120 Cr Acc.Payable 720 To eliminate the intragroup transaction : Dr Acc.Payable 720 Cr Acc. Receivable 720 Dr Revenue 600 Cr PPE 600 But what happens to cos and unrealised profit? Also the asset was AUC in the parent but it will be amortized by the subsidiary. Doesn't amortization have an effect in further consolidation ? Could you please share your thoughts ? Tnx

Personally I wouldn't have the transaction recorded in Revenue in the first place! I would transfer the asset under construction into a Disposal Account Dr Disposal Account 585 Cr Asset under Construction Account 585 Dr Receivables 720 Cr Disposal Account 720 Dr Disposal Account 120 Cr Vat 120 Balance off disposal account Dr Disposal Account 15 Cr Profit or Loss Account 15 In the subsidiary: Dr TNCA 600 Dr Vat 120 Cr Payables 720 On consolidation Dr Payables 720 Cr Receivables 720 Dr Retained Earnings 15 Cr TNCA 15 That gets rid of all intra-group balances and eliminates the profit element of 15 recognised on transfer Think these through and see now if you can agree I really do NOT like your entry Dr Cos, Cr AuC Which account within the Cost of Sales calculation are you going to debit?