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Effects of Intercompany Transactions at Consolidation

Chapter 5 introduces you to the intercompany sales of inventory, land, and depreciable assets as these transfers result in similar consolidation procedures. Discuss the effects of intercompany transactions when consolidating financial statements. Your discussion should include the effects on both the parent and the subsidiary.

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Intercompany sales, when firms that will be consolidated sell items to each other, the sales that are not to outside parties, must be eliminated. This eliminates profit or mark-up on transfers to itself. Eliminating intra-entity profits is the job of the consolidating entries for transfers of inventory, land and depreciable assets (any transfer not done at historical cost).

With intercompany transfers, the transfer can be from the parent to the subsidiary, from the subsidiary to the parent, or from subsidiary to subsidiary. The consolidating entries must remove the gross profit recognized on these transfers if the goods were not already sold to outside parties (because then it is recognizable). Thus, the entries analyze inventory remaining that has gross profit in it from a intra-entity transaction.

The entry ...