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intercompany transactions

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › intercompany transactions

  • This topic has 11 replies, 4 voices, and was last updated 9 years ago by MikeLittle.
Viewing 12 posts - 1 through 12 (of 12 total)
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  • May 13, 2010 at 1:10 pm #43886
    lunik
    Member
    • Topics: 3
    • Replies: 7
    • ☆

    My question is following.I know that intercompany transactions must be eliminated.The solution in my book is not understandable.For example the parent company sold goods to its subsidiary for 625$,but cost of goods is 500$.Is the following adjustment correct?
    Sales All sales -625
    Cost of goods All cost of goods -500
    Gross profit (All sales-625)- (All cost of goods-500)+(625-500-unrealized profit)

    May 14, 2010 at 4:52 pm #60350
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23312
    • ☆☆☆☆☆

    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.

    May 14, 2010 at 8:48 pm #60351
    Anonymous
    Inactive
    • Topics: 0
    • Replies: 26
    • ☆

    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

    May 16, 2010 at 9:05 pm #60352
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23312
    • ☆☆☆☆☆

    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 )

    August 16, 2015 at 9:15 pm #267437
    bube
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    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

    August 16, 2015 at 9:42 pm #267439
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23312
    • ☆☆☆☆☆

    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?

    August 17, 2015 at 8:19 am #267473
    bube
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    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

    August 17, 2015 at 1:12 pm #267507
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23312
    • ☆☆☆☆☆

    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?

    August 17, 2015 at 1:42 pm #267510
    bube
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    Yes it is, with one more entry
    Dr AUC 585
    Cr Cos 585

    Profit on sale is 15

    August 17, 2015 at 4:42 pm #267530
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23312
    • ☆☆☆☆☆

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

    August 18, 2015 at 8:35 pm #267679
    bube
    Member
    • Topics: 1
    • Replies: 4
    • ☆

    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

    August 18, 2015 at 9:56 pm #267685
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23312
    • ☆☆☆☆☆

    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?

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