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while preparing the consolidated statement of financial position…when do we have to eliminate the intra-company (ie…deduct d amount from receivables and d payables) transactions….if they specify that ”there is a trading happening between the parent n d subsidiary”…or if they mention dat d subsidiary /parent SOLD goods to the parent/subsidiary ?
Two elements here. You have mentioned only the SofFP but I’ll cover the SofI also.
In the Consolidated Statement of Income, all the intra-group trading should be eliminated from both Revenue and from Cost of Sales – it’s like selling to yourself and buying from yourself.
So, $ for $ eliminate from both Revenue and Cost of Sales the full selling value of the goods sold during the year.. There’s then a little problem about the inventory valuation held by the buying entity because that inventory will be valued at cost to the buyer whereas, for the sake of the GROUP financial statements, it should be valued at cost to the GROUP.
We therefore need to eliminate from the combined inventory the unrealised profit element included within that inventory.
This we do by reducing the combined inventory on the SofFP by the amount of the unrealised profit and by ADDING the same amount to the combined Cost of Sales
For the Consolidated SofFP, there is clearly an adjustment to the combined inventory, as explained above.
But there may also be amounts outstanding in Receivables and in Payables – one entity has been buying from the other, on credit, and has not paid the full amount due as at the year end.
Both the Receivable amount and the Payable amount SHOULD be equal but the examiner can add a little complication by saying that the two are not the same “…because there is an amount of cash paid on 30 September which wasn’t received until 4 October ….” or similar ( it could be goods despatched on 29 October not received until 5 November, for example )
Whatever, as at the year end, the amounts in the two sets of records are not the same and must be reconciled.
Accelerate the goods / cash into the records of the entity which will receive these in transit items – so, for example, Increase the cash figure and decrease the Receivables figure by the amount of the cash in transit and make this adjustment in the receiving entity’s records ( on the face of your question paper )
Following these “in transit” adjustments, the two current accounts ( both the Receivable and the Payable Current Accounts ) now reconcile and we can cancel the reconciled amounts out of both combined Receivables and combined Payables.
Is that better?
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