INVENTORY AND FIXED ASSETS

 The parent may enter into transactions with its

subsidiary.
 These intercompany transactions must be
eliminated when preparing consolidated Financial
Statements
 Because the parent and its subsidiary are viewed as
a SINGLE REPORTING ENTITY
 You cannot transact with your own self
 DOWNSTREAM – Parent (P) sells to Subsidiary (S)

 UPSTREAM – S sells to P
 The parent recognizes the profit
 NCI is not affected
 Because the profit pertains solely to the owners of
Parent
 The Subsidiary recognizes the profit.
 NCI is affected because the profit pertains
to both the owners of S and NCI
 Sale of Inventories

 Sale of Fixed Assets

 When a company sells merchandise to an affiliate, one of two
situations results

1. The merchandise is resold to outsiders during the same period

2. The merchandise is resold to outsiders during the next period

For consolidation purposes, profits recorded on an intercompany inventory sale

are REALIZED in the period in which the inventory is RESOLD TO OUTSIDERS

Until the point of resale, all intercompany profits must be DEFERRED

 P sells inventory costing P72,000 to S, its 80% owned
subsidiary, during 2017 for P120,000.
 At year’s end, 30% is left.

 During 2018, P sells inventory costing P200,000 to S for

P250,000.
 At year’s end, 20% is left.

 Question: How much should be included in the

consolidated comprehensive income?
 36,000
For 2018, the Unrealized
X
For 2017, the Unrealized Gross Profit = 10,000
40%
Gross Profit = 14,400 should
should Be ELIMINATED
Be ELIMINATED
To complete the problem…
 SALES
 COGS
 OPEX
 NCI in CI of Subsidiary
 Inventory
 Consolidated CI
 NCI
(902,000 / 80%)*20% = 225,500
 Intercompany sale of fixed assets are unusual transactions

 Unlike intercompany sale of inventories, the relatively long useful

lives of assets require the passage of many accounting periods
before intercompany gain or loss on sales are realized in transaction
with outsiders.
 Any gain or loss is DEFERRED and
1. Amortized over the asset’s remaining life, if the asset is
depreciable
2. Recognized only when the asset is sold to an UNRELATED PARTY

 If the asset is SUBSEQUENTLY sold to an UNRELATED PARTY, the

unamortized balance of the deferred gain or loss is RECOGNIZED in
profit or loss
 The gain or loss is adjusted to the controlling interest only

 Therefore, NCI is not affected.

 The adjustments for the gain or loss are shared between
the controlling interest and NCI

 Therefore, NCI is affected

The unamortized balance of the deferred gain
or loss is ELIMINATED

when the consolidated financial statements are

prepared.