Intercompany Entries

1 Intercompany Transactions - Heading
2 Parent & Subsidiary Shown As 1 Company in Consolidation Financial Statements
Affiliated Cos do business with each other

E.g., S sells merchandise to P
Chapter 4 Intercompany Transactions
Books of P & S fully reflect transactions

Books
B k have
h
allll off th
the regular
l jjournall entries
ti
E.g., books have:
S has A/R from P
P has A/P to S
In Consolidation
P & S are shown as 1 Co.
E.g., Must eliminate intercompany accounts (A/R & A/P)

Because one Co doesnt not owe $ to itself
These WS entries same regardless of accounting method

Cost, Simple Equity or Sophisticated Equity Methods
3 Intercompany Sales of Merchandise - Heading
4 Intercompany Sales of Merchandise E.g. - #1
Assume P sells inventory to S
Intercompany Sales of Merchandise
Inv orig cost $1,000

Inv sold by P to S for $1,200
Inv sold byy S for $1,500
,
to 3rd p
party
y
W/O eliminations
Total Sales & Total COGS too high
S
$1,500
P
$1,200
Total
$2,700
L
Less:
COGS
1200
1000
2200
Gross Profit
$300
$200
$500
Sales
6 Worksheet Entry Intracompany Sale of Merchandise E.g. - #3
5 Intercompany Sales of Merchandise E.g. - #2
Consolidation shows P & S as 1 Co

Need to eliminate intercompany sale
This is done in IS entry
Get rid of $1,200 transfer price

Get rid of $1,200
$1 200 COGS based on intercompany sale
If you do this:
Sales
IS stands for Intercompany Sale
IS D.
IS
rd
Sales Revenue (1st Seller)

C. Cost of Goods Sold (2nd Seller)
$1,200
$1,200
$1,500 ($1500 sale to 3 party)
Less: COGS
1000 ($1000 original cost to Parent)
Gross Profit
$500
8 Division of Profit From Sale of Merchandise Inventory - #2
7 IA Entry
In E.g.
If intercompany sale is credit sale:
Who gets it?

Intercompany price divides it between P & S
Must eliminate A/R & A/P

Called Intercompany Accounts
P gets $200 of profit ($1200 -$1000) &

S gets $300 of profit ($1500 - $1200)
Reporting as if P & S are 1Co

You dont owe $ to yourself
$1,200 price used to divide $500 profit between

P&S:
Use End of Year Balance of A/R&A/P

y
((2nd Seller))
IA D. Accounts Payable
IA
C. Accounts Receivable (1st Seller)
$500 profit
S
$1,500
P
$1,200
Total
$2,700
Less: COGS
1200
1000
2200
Gross Profit
$300
$200
$500
$1,200
,
$1,200
Sales
10 EI Entry - Heading
These WS entries are the same regardless of

whether you have a NCI
You are presenting both P&S as if they are 1 Co.
EI Entry
The
Th existence
i t
off NCI d
doesnt
t change
h
thi
this
It only affects who gets equity
11 Need Sale to Unrelated Third Party
No real sale unless you have sale to 3rd

party (unrelated)
Without sale to 3rd party
Really just moving inventory from sellers to
buyers place of business
Reporting as if 1 Co
S
$1,500
P
$1,200
Total
$2,700
Less: COGS
1200
1000
2200
Gross Profit
$300
$200
$500
Not
Booked
Booked
Sales
You cant sell something to yourself
No rev recognized unless ultimate sale to 3rdd

party
If no sale to 3rdd party

P has taken $200
$
profit
on its books
We want to delay $200K profit until S sells inv to
3rd Party
13 Defer Profit Until Sale to Third Party
BIG PICTURE:
Until sale to 3rd party
14 EI Entry - #1
If merchandise not sold to 3rd party in 1st year:

1st, do WS entries as if sale to outsider:
GAAP requires
Same as before
Seller does not recognizes profit from

intercompany sale
Intercompany profit deferred (suspended)
until sale to 3rd party
Inventory reduced to orig cost
IS D. Sales Revenue (1st Seller)

$1,200
nd
IS
C. Cost of Goods Sold (2 Seller)
$1,200
nd
IA D. Accounts Payable (2 Seller)
$1,200
st
IA
C. Accounts Receivable (1 Seller)
$1,200
After sale to 3rd party

P & S then report their share of profit on sale
of merchandise
16 EI entry E.g., - #101
15 EI Entry - #2
E.g., Assume
Then, We need to:
P buys inv for $10,000

P sells inv to S for $15,000 on credit
Eliminate markup from inventory

Credit Inventory for amount of Sellers deferred profit
50% Mark Up
Eliminate Sellers profit:

p
S does not sell inv to 3rd party in 1st year
Debit COGS for amount of Sellers deferred profit
We do the following on the WS
An increased COGS reduces profit

Allocate increased exp (COGS) to 1st Seller
Done in EI Entry
EI stands for Ending Inventory
It suspends on WS (not books of P&S) the profit from the
1st sale (and the corresponding mark up of inv) until after
the inv is sold in the 2nd sale.
EI D. Cost of Goods Sold

EI
C.
Inventory
IS D. Sales Revenue
IS
C. Cost of Goods Sold
IA
C. Accounts Receivable
$15,000
$15,000
$15,000
$15,000
$200
$200
17 EI Entry E.g., - #102
18 EI Entry E.g., - #102
WS entries eliminate effects of intercompany sale
S has all of inv at end of year

EI entry
Intercompany Sale
-- COGS
Done with debit to COGS
-- Purchase Inventory
Done with credit to Inv
IS Entry
$5,000
A/P
EI Entry
COGS
C
C
10000
Sellers
Seller
s Books
15000
Buyers Books
Sellers Books
Buyers Books
15000
COGS
IA Entry
$5 000
$5,000
Sellers Books
15000
A/P
Sales
C
Sellers Books
15000
10000
Inv
Inv.
Inv.
C
15000
Sales
COGS
C
Intercompany Sale
Reduces cost of inv to orig cost
A/R
C
Intercompany Sale
Defers Ps profit

EI
C.
C
Inventory
-- Revenue
WS
15000
15000
A/R
15000
5000
Inv
WS
WS
WS
WS
5000 WS
After these entries NOTHING LEFT OF INTERCOMPANY

SALE
19 EI entry E.g., - #201
20 EI Entry E.g., - #202
What if S sold half of the inventory

S has of inv at end of year
EI entry
Half is still unsold.
E.g., Assume
Defers Ps profit on unsold of inv
P buys inv for $10,000

P sells inv to S for $15,000 on credit
Done with debit to COGS
Reduces cost of of inv to orig cost
50% Mark Up
S sells of inv to 3rd party in 1st year for $10,000 on

credit
IS D. Sales Revenue
IS
IA
C. Accounts Receivable
Done with credit to Inv

EI
C.
C
Inventory
$15,000
$2,500
$2 500
$2,500
$15,000
$15,000
$15,000
21 EI Entry E.g., - #203
22
Intercompany Sale
-- Revenue
If of intercompany merchandise is sold to 3rd

party for $10,000
Intercompany Sale
Intercompany Sale
3rd Party Sale
This is the amount owed by 3rd party real A/R
-- COGS
COGS should be $5,000
IS Entry
This is the original cost of the inventory sold to 3rd party

g cost (($10,000/2))
of orig
IA Entry
Inv should go down by $5,000

This is the original cost of the inventory sold to 3rd party
of orig cost
EI Entry
10000
7500
Buyers Books
7500 Buyers Books
15000
COGS
WS
15000 WS
15000
A/R
COGS
C
B
Buyers
Books
B k
10000 Buyers Books
Inv.
A/P
C
Buyers Books
15000 Buyers Books
Sales
Sales
C
Sellers Books
10000 Sellers Books
15000
COGS
C
10000
A/P
A/R
C
Sellers Books
15000 Sellers Books
Inv.
Inv.
C
15000
Sales
COGS
C
-- Revenue
A/R should be $10,000
Inv
WS
15000 WS
2500
WS
2500 WS
After you are done with these entries:

Sales Rev
$10K increase; A/R
$10K increase
COGS
$5,000 increase; Inv
$5,000 decrease
If P is intercompany seller & no sale to 3rd party

Ps inc has intercompany profit which must be deferred
Done with EI entry
Increase in COGS fro EI entry reduces profits on WS
Given to intercompany seller in Income
Distribution Schedule
If P is intercompany seller
Nothing wrong with Ss inc
Income Distribution Schedule of WS:
Subsidiary Income Distribution

Internally generated net income
$50,000
Adjusted income
$50,000
NCI
-- COGS
3rd Party
P t Sale
S l
This is the sale to the 3rd party real sale
NCI share
-- Purchase Inventory
Sales Rev should be $10,000
A/R
20%
$10,000
Unrealized profit in
ending inventory
Parent Income Distribution

$5000 Internally generated net
income
80% of Sub adjusted
income of $50,000
Controlling Interest
$100,000
40,000
$135,000
26 BI Entry - #1
25 BI Entry - Heading
BI Entry
What about the next year?

If intercompany merchandise is sold to 3rd party
Now, intercompany seller can take deferred profit
PROBLEM
seller
ll ttook
kd
deferred
f
d iintercompany
t
profit last year on its books
So, deferred intercompany profit is already reported in
1st sellers RE
1st need to eliminate deferred intercompany

profit from 1st seller
sellers
s beginning RE
2nd give 1st seller deferred intercompany profit
this year
27 BI Entry - #2
28 BI Entry Income Distribution Schedule - #1
WS entry called BI for Beginning Inventory

Debit to RE reduces beginning balance of RE
When P gets deferred profit that will
i
increase
RE att end
d off thi
this year
Credit to COGS
increases profits
Given to intercompany seller
Gives intercompany seller profit deferred
from previous year
Nothing wrong with Ss inc
Income
I
Distribution
Di t ib ti S
Schedule
h d l off WS
WS:
$50,000
Adjusted income
$50,000
NCI share
BI D. Retained Earnings
BI
C.
Cost of Goods Sold
NCI
$5,000
20%
$10,000
$5,000
30 Intercompany Sales of Merchandise Miscellaneous Issues - Heading
29 BI Entry Income Distribution Schedule - #2
Assume
P gets deferred profit from last year - $5K
BI Entry

Miscellaneous Issues
$100,000
Deferred Profit In Beginning

Inventory
5,000
80% of Subsidiary adjusted

income of $50,000
$
40,000
$145,000
Remember that intercompany price divides it

between P & S
Controlling Interest vs.

Non-Controlling Interest
P gets $200 of profit ($1200 -$1000) &

S gets
g
$300 of p
profit (($1500 - $1200))
S
$1,500
P
$1,200
Total
$2,700
Less: COGS
1200
1000
2200
Gross Profit
$300
$200
$500
Sales
34 If Subsidiary is Intercompany Seller - #1
BI entry has debit to RE:
This is important if NCI
BI D. Retained Earnings
BI
NCI gets share of Ss profit

NCI gets none of Ps
P s profit
$5,000
$5,000
When P is intercompany seller

Use Ps RE
When 100% owned S is intercompany seller

Use Ps RE
When S (with NCI) is intercompany seller

Use Ps RE for CI share of deferred profit
Use Ss remaining RE for NCI share of deferred profit
35 If Subsidiary is Intercompany Seller - #1
E.g., If P owns 80% of S, then split debit to RE:
BI D. Retained Earnings, Parent (80%)

Retained Earnings, Sub. (20%)
BI

At Loss
$4K
1K
$5K
37 Periodic Inventory System
38 Intercompany Sales of Non-Depreciable Asset - Heading
What if intercompany sale produces a loss

Intercompany Sales of NonDepreciable Asset (Land)
If inventory really dropped in value

IIntercompany
t
seller
ll can recognize
i lloss
Can recognize loss w/o sale using LCM anyway
If the loss is artificial

Loss is deferred until sale to 3rd party
39 Intercompany Sales of Non-Depreciable Asset - #1
Intercompany sale of non-depreciable

asset (Land)
gain deferred until asset sold to unrelated 3rd
party
1st Year
Debit for gain defers intercompany sellers gain
Credit eliminates mark-up
mark up (intercompany profit) from
cost of Land
Returns Land to its original cost
If asset never sold, deferral is permanent

WS entry called LA Entry
LA stands for Land or Land Adjustment
LA D. Gain on Sale of Land

LA
C.
Land
$Mark-Up
$Mark-Up
10
Year where Land sold to 3rd party
Later Years
Still need to take it out of sellers RE

Doesnt belong there YET
Debit
D bit RE
LA D. Retained Earnings, Parent $Mark-Up
Allow intercompany seller to take profit

Credit to Gain
LA
C. Land
$Mark-Up
LA D. Retained Earnings,
g Parent
This WS entry done each year until Land is

sold to 3rd party
43 Intercompany Sales of Depreciable Assets - Heading
Intercompany Sales of Depreciable

Assets
LA
$Mark-Up
p
C Gain on Intercompany
. Sale of Land
$Mark-Up
44 Intercompany Sales of Depreciable Asset - #1
Gains from Intercompany sale of

depreciable assets are similar to Land
Gain deferred until asset sold to unrelated 3rd
party
Write down asset back to orig cost.
Also need to undo depreciation taken on

buyers books for mark-up
Asset
A
t is
i on b
buyers
b
books
k att hi
higher
h value
l
It is producing too much depreciation
Need to undo that extra depreciation exp
11
46 F2 Worksheet Entry
45 F1 Worksheet Entry
There are two FA entries

First we eliminate the intercompany gain on the
sale of the machinery:
Next, eliminate the increased depreciation

expense on the machinery
Just depreciation
p
on the mark-up
p
FA2
FA1 D.
FA1
Gain on Sale of
Machinery
C
C.
Machinery
$10,000
FA2
$10 000
$10,000
47 Effect of Undoing Depreciation of Mark-Up - #1
We give extra income to seller

1st year seller loses gain
1st & later years seller gets increased
income
Eventually, seller gets extra income = its
deferred intercompany gain
This can be seen in Income Distribution
S h d l off WS
Schedules
D.
Accumulated Depreciation
C.
$2,000
Depreciation Expense
$2,000
This WS entry reduces expenses reported on

buyers books
It creates income on the WS (consolidation
level)
Who gets this income?

I
Internally
ll generatedd net income
i
$25 000
$25,000
Adjusted income
$25,000
NCI share
NCI
20%
$5,000
12
50 F1 Worksheet Entry Second Year

Unrealized gain
on the sale of
machine
$10,000 Internally generated

net income
80% of Subsidiary
adjusted income of
$25,000
Gain realized
through use of
machine sold to
Subsidiary
$30,000
20,000
FA2
FA2
2,000
FA1
FA1
FA1
D.
Retained Earnings,
g , Parent
Cr. Machinery
$8K
$2K
$10K
$42,000
52 Income Distribution Schedules Second Year - #1
The Income Distribution Schedules for 2nd year

would appear as follows:
same as 1st:
D. Accumulated Depreciation
C.
Gain now in RE
We disallowed $10K, but let seller have $2K more income
Net is 8K
51 F2 Worksheet Entry Second Year
FA2 entry in 2nd year
The FA1 entry in the second year, is as follows

Blue area reduces Machinery back to orig cost
Yellow area reduces what remains of intercompany
gain
Depreciation Expense
$2,000
$2,000

$24,000
Adjusted income
$24,000
NCI share
h
NCI
20%
$4,800
13
54 F1 Worksheet Entry Third Year
53 Income Distribution Schedules Second Year - #2

I
Internally
ll generatedd net income
i
80% of Subsidiary income of $24K
Gain realized through use of
machine sold to Subsidiary
$50 000
$50,000
The FA1 entry in the third year, is as follows

Blue area reduces Machinery back to orig cost
Yellow area reduces what remains of
intercompany gain
Gain now in RE
We disallowed $10K, but let seller have $4K more
income
19,200
2,000
Net is 6K
$71,200
Retained
i dE
Earnings,
i
P
Parent
FA1
A1 D. R
1/1/2002
FA1
FA1
55 Intercompany Construction of Depreciable Assets - Heading
Intercompany Construction of
Depreciable Assets
Cr.
$6 000
$6,000
4,000
Machinery
$10,000
56 Intercompany Construction of Depreciable Asset - #1
What if one member of consolidation

group constructs asset for affiliated client?
Builder is selling depreciable asset to Client
Do the same entries we just talked about
This subject introduces new entries

dealing with the construction period.
14
58 Intercompany Construction of Depreciable Asset - Builders entries - #1
57 Intercompany Construction of Depreciable Asset - #2
Look at the entries made by P&S on their

books
S (builder) records cost of construction during
1st year on S
Ss
s books:
Builder and client are using accounts that

are appropriate for two unrelated parties
Wrong
g account names are being
g used
Using account names used by contractor and
client
D.
But, we are presenting the two Cos as if

they are 1 Co.
Construction in Progress
C.
Payables
$200,000
$200,000
Construction in Progress is the name used by a

contractor Asset
contractor.
Asset Under Construction is the name used by
a Co building its own Asset
We have to change the names of the

accounts to reflect 1Co building asset for itself
Remember, we are presenting P&S as if one Co.
59 Intercompany Construction of Depreciable Asset - Builders entries - #1A
60 Intercompany Construction of Depreciable Asset Builders Entries - #2
Builders Balance Sheet

Const In Prog
$200K
Payables
$200K
The S (builder) records billings on Ss books:
D.
Contracts Receivable
C. Billings on Construction in Progress
$150,000
$150,000
The Billings account is a contra account that

reduces the Construction in Progress account.
The Contracts Receivable is an Intercompany

Account One Co cannot owe money to itself.
15
62 Intercompany Construction of Depreciable Asset - Clients entries - #1
61 Intercompany Construction of Depreciable Asset - Builders entries - #2A

Const In Prog
` Billings
$200K Payables
$200K
-150K
D
D.
Assets Under Construction

$150 000
$150,000
C.
Contracts Payable
$150,000
Asset Under Construction is the correct name for Co
building an asset for itself, but the Amount ($150K) is too
small. Contracts Payable is an Intercompany Account.
$50K
Contract Rec.
P (client) also records billings on Ps books:
150K
63 Intercompany Construction of Depreciable Asset - Clients entries - #1A
64 LT1 Entry - #1

Const In Prog
` Billings
$200K Payables
$200K
On WS
want to eliminate Intercompany
Accounts (A/R & A/P):
-150K
$50K
Contract Rec.
150K
LT1 D. Contracts Payable

LT1
C. Contracts Receivable
$150,000
$150,000
Clients Balance Sheet

Asset Und Constr.
$
$150K
Contract Pay.
$
$150K
16
65 LT1 Entry - #1A
66 LT2 Entry - #1

Const In Prog
` Billings
$200K Payables
Also want to eliminate Construction in Progress

account & Billings account
Add unbilled construction cost to Asset Under
Construction.
$200K
-150K
$50K
Contract Rec.
150K

Asset Und Constr.
$
$150K
Contract Pay.
$
$150K
67 LT2 Entry - #1A
LT2
LT2
LT2
D.
Billings on Construction in Progress

Assets Under Construction
C. Construction in Progress
$150,000
50,000
$200,000
68 End Result of LT1 & LT2 Entries

Const In Prog
` Billings
Contract Rec.
$200K Payables
$200K
-150K
After LT1 & LT2 entries, left with:
$50K
$200,000
$
balance in Assets Under
Construction, and
Payables of $200,000
150K

Asset Und Constr.
Add To Ass Und Constr.
$
$150K
Contract Pay.
$
$150K
50K
$200K
17
69 Consolidated Balance Sheet After LT1 & LT2
70 Builders Intercompany Profit
Consolidated Balance Sheet

Asset Under Construction
$200K Payables
$200K
(NOT ON TEST)
Builder might take intercompany profit
(Percentage of Completion Method):
D. Construction in Progress
C. Earned Income on Long-Term Contract
$50K
$50K
72 Intercompany Lending - Heading
71 LT 3 Entry
If so, eliminate Builders profit on WS:
Intercompany Lending
LT3 D. Earned Income on Long-Term Contract
LT3
C. Construction in Progress
$50K
$50K
18
73 LN1 Entry
74 LNs Entry
If there is intercompany borrowing?

Eliminate the Intercompany note:
LN1 D.
LN1
Notes Payable
C. Notes Receivable
Eliminate interest receivable and payable:

LN2
LN2
$10,000
D.
Interest Payable
C.
Interest Receivable
$400
$400
$10,000
75 LN1 Entry
Eliminate interest income and expense:

LN3
LN3
D. Interest Income
C.
Interest Expense
$400
$400
19

Intercompany Entries

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Intercompany Entries

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1 Intercompany Transactions - Heading

2 Parent & Subsidiary Shown As 1 Company in Consolidation Financial Statements

Affiliated Cos do business with each other

Chapter 4 Intercompany Transactions

Books of P & S fully reflect transactions

P & S are shown as 1 Co.

E.g., Must eliminate intercompany accounts (A/R & A/P)

These WS entries same regardless of accounting method

3 Intercompany Sales of Merchandise - Heading

4 Intercompany Sales of Merchandise E.g. - #1

Assume P sells inventory to S

Intercompany Sales of Merchandise

Inv orig cost $1,000

6 Worksheet Entry Intracompany Sale of Merchandise E.g. - #3

5 Intercompany Sales of Merchandise E.g. - #2

Consolidation shows P & S as 1 Co

This is done in IS entry

Get rid of $1,200 transfer price

IS stands for Intercompany Sale

Sales Revenue (1st Seller)

$1,500 ($1500 sale to 3 party)

1000 ($1000 original cost to Parent)

8 Division of Profit From Sale of Merchandise Inventory - #2

If intercompany sale is credit sale:

Who gets it?

Must eliminate A/R & A/P

P gets $200 of profit ($1200 -$1000) &

Reporting as if P & S are 1Co

$1,200 price used to divide $500 profit between

Use End of Year Balance of A/R&A/P

9 Division of Profit From Sale of Merchandise Inventory - #2

These WS entries are the same regardless of

11 Need Sale to Unrelated Third Party

No real sale unless you have sale to 3rd

12 Division of Profit From Sale of Merchandise Inventory - #2

You cant sell something to yourself

No rev recognized unless ultimate sale to 3rdd

If no sale to 3rdd party

13 Defer Profit Until Sale to Third Party

If merchandise not sold to 3rd party in 1st year:

Seller does not recognizes profit from

IS D. Sales Revenue (1st Seller)

After sale to 3rd party

16 EI entry E.g., - #101

Then, We need to:

P buys inv for $10,000

Eliminate markup from inventory

Eliminate Sellers profit:

S does not sell inv to 3rd party in 1st year

Debit COGS for amount of Sellers deferred profit

We do the following on the WS

An increased COGS reduces profit

EI D. Cost of Goods Sold

17 EI Entry E.g., - #102

18 EI Entry E.g., - #102

WS entries eliminate effects of intercompany sale

S has all of inv at end of year

Done with debit to COGS

Done with credit to Inv

Reduces cost of inv to orig cost

EI D. Cost of Goods Sold

After these entries NOTHING LEFT OF INTERCOMPANY

19 EI entry E.g., - #201