C6-1 Measuring Cost of Goods Sold Shortcut Charlie usually manages to develop so

Question

C6-1 Measuring Cost of Goods Sold

Shortcut Charlie usually manages to develop some simple rule to handle even the most complex situations. In providing for the elimination of the effects of inventory transfers of inventory transfers between the parent company and a subsidiary or between subsidiaries. Shortcut started with the following rules:

1) When the buyer continues to hold the inventory at the end of the period, credit cost of goods sold for the amount recorded as cost of goods sold by the company that made the intercompany sale.

2) When the buyer resells the inventory before the end of the period, credit cost of goods sold for the amount recorded as cost of goods sold by the company that made the intercompany sale plus the profit recorded by that company.

3) Debit sales for the total amount credited in rule 1 or 2 above.

One of the new employees is seeking some assistance in understanding how the rules work and why.

REQUIRED:

a. Explain why rule 1 is needed when consolidated statements are prepared.

b. Explain what is missing from rule 1, and prepare an alternative or additional statement for the elimination of unrealized profit when the purchasing affiliate does not resell to an unaffiliated company in the period in which it purchases inventory from an affiliate.

c. Does rule 2 lead to the correct result? Explain your answer.

d. The rules do not provide assistance in determining how much profit was recorded by either of the tow companies. Where should the employee look to determine the amount of profit referred to in rule 2?

Explanation / Answer

a

The purpose of preparing consolidated financial statements is to report financial condition and operating result of a consolidated business group, which is assumed as one entity comprised of more than one companies (including entities other than "companies") under a common control.

b

c

yes because mpanies are subsidiaries.

- If a company is a reorganized, liquidated, bankrupt or other similar company and there is no unity of organization because of no effective control, the company is not a subsidiary.

- An effective control is a control over the decision-making body of a company. A company that shows one of the following indications is assumed as a subsidiary, unless any counter evidence supports that no effective control exists over the decision making body

d

1. A portion of the net assets that is not attributed to the parent should be attributed to the minority interest.

- Stated and additional paid-in capital and retained earnings as of acquisition date of shares or control should be divided into the portion attributed to the parent and the portion attributed to the minority shareholders. The former portion should be offset with the investment by the parent and eliminated, and the latter portion should be accounted for as the minority interest.

2. If accumulated losses of a subsidiary that would otherwise be attributed to the minority interest exceeds the accumulated amount of the minority interest should be attributed to the parent's interest. In this case, if the subsidiary raises net income in succeeding periods, the income should be attributed to the parent's interest until the accumulated losses that has previously been attributed to the parent are recovered.

3. Retained earnings earned after the acquisition date of shares or control that are attributed to the minority shareholders should be accounted for as minority interest.

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