Financial Statements - Inter company adjustments

Claire1705

At long last I am due to sit this exam a week on Friday and having worked through some practice assessments I seem to be getting a bit muddled with the treatment if inter company adjustments when it comes to calculating revenue and cost of sales dependant upon the transaction i.e. goods left unsold etc in the consolidated statement of comprehensive income. Does anyone have an simple/easy to remember explanations? I could lose easy marks if I get this question and can't get it sussed!

Clintm15

Hi Claire,

I'm assuming that the upstream and downstream transactions of associates are outside of your syllabus? Please correct me if I'm wrong. So you will be focusing on in intra-company group transactions?

In terms of unsold inventories you will need to adjust for the amount of unrealised profit in both the SFP and the SPL as well as cancelling the transaction.

For example, if company A sold goods purchased for £3,000 to company B for £5,000 and half of the inventories were left in inventory at year end the entries would be....

SPL

DEBIT £5,000 from Sales Revenue from Company A.

CREDIT £5,000 from Cost of Sales from Company B.

Then you would reduce the gross profit of Company A by adding the unrealised profit to their Cost of Sales. In this case the unrealised profit is (£5,000 - £3,000) * 1/2 = £1,000

SFP

DEBIT £5,000 from the Payable's of Company B.

CREDIT £5,000 from the Receivables of Company A.

DEBIT £1,000 from the Retained Earnings of Company A.

CREDIT £1,000 from the Inventory of Company A.


These of course are adjustments prior to consolidation.


I hope this helps