Consolidating financial statements eliminations
We are trying to get back to our original cost, eliminating the impact of the intercompany sale and profit.If our cost was originally 0,000 and we sold 70% to outside customers, our cost of sales should be ,000.
But, we have ,000 in ending inventory (0,000 cost to Company B minus 0,000 relieved from inventory for sales).We also need to eliminate some or all of the cost of sales.How much of the cost of sales depends on the profit amount and the amount of inventory remaining at the end of the year.At this point, you can see that the financial results of A have ,000 of intercompany profit in them.We need to eliminate the effect of this sale because including it misstates the results to users of the financial statements (i.e. If we did not eliminate this sale, companies could sell back and forth between their subsidiaries to inflate their results, but after those transactions, the consolidated company has not made any additional profit or brought in any additional cash.We know Company A recorded ,000 of profit on the intercompany sale.Since 30% of the inventory remains with Company B, we can multiply the ,000 profit by 30% to see that inventory is overstated by ,000 of intercompany profit.One of the tricks to solving problems involving intercompany eliminations is to understand the entries that A and B would book in these cases. To determine the sales price, we need to divide the 0,000 cost by 60% (100%-40% margin).One of the other tricks is understanding the relationship between cost and margin percentage. This gives us a sales amount of 0,000 and an intercompany profit amount of ,000.Treat such sales as transfer of inventory between stores owned by the same entity.You should actually acknowledge that the transferred items merely switched premises and not ownership.