Asif
26-02-08, 10:15 PM
Hey Acid, u went offline last night (night in my time)…so here is an example of the unrealized profit
Income Statement as at 31st Dec 2007
Parent (A) Subsidiary (B)
Sales 12500 10000
C.O.G.S
Opening Inv 2000 4000
Purchase 10000 6000
Closing Inventory (2000) 10000 (2000) 8000
Gross Profit 2500 800
Company A sells pirated GTG F7 text to company B at a margin of 25 %, during the year 2007 company A sold books worth $ 1000 (at selling price) to company B.
At year end while consolidating we need to deduct the $ 1000 sales from the parents I\S and also deduct $ 1000 from the subsidiary’s cost of goods sold (since this is the price by which it bought the goods). At year 50 % of books could not be sold and remained at B’s inventory ($ 500)
Now see
Parents sales - 11500
(12500-1000)
Subsidiary’ purchase - 5000
(6000-1000)
Look now -
Parent (A) Subsidiary (B)
Sales 11500 10000
C.O.G.S
Opening Inv 2000 4000
Purchase 10000 5000
Closing Inventory (2000) 10000 (2000) 7000
Gross Profit 1500 3000
But..the closing inventory still good unsold goods of $ 500
So, since the consolidated I\S is made so that it looks like as if both were the same company (single economic entity). The inventory will not be valued at $ 500 as because there is profit margin included in that figure , 25 % margin (500 * 25/125 = 100) , so we have to deduct $ 100 from the closing inventory of the subsidiary (500-100 = 400), ultimately 2000- 100 = 1900.
Deducting closing inventory means increasing cost of goods sold.
Parent (A) Subsidiary (B)
Sales 8500 10000
C.O.G.S
Opening Inv 2000 4000
Purchase 10000 5000
Closing Inventory (2000) 10000 (1900) 7100
Gross Profit 2500 2900
Income Statement as at 31st Dec 2007
Parent (A) Subsidiary (B)
Sales 12500 10000
C.O.G.S
Opening Inv 2000 4000
Purchase 10000 6000
Closing Inventory (2000) 10000 (2000) 8000
Gross Profit 2500 800
Company A sells pirated GTG F7 text to company B at a margin of 25 %, during the year 2007 company A sold books worth $ 1000 (at selling price) to company B.
At year end while consolidating we need to deduct the $ 1000 sales from the parents I\S and also deduct $ 1000 from the subsidiary’s cost of goods sold (since this is the price by which it bought the goods). At year 50 % of books could not be sold and remained at B’s inventory ($ 500)
Now see
Parents sales - 11500
(12500-1000)
Subsidiary’ purchase - 5000
(6000-1000)
Look now -
Parent (A) Subsidiary (B)
Sales 11500 10000
C.O.G.S
Opening Inv 2000 4000
Purchase 10000 5000
Closing Inventory (2000) 10000 (2000) 7000
Gross Profit 1500 3000
But..the closing inventory still good unsold goods of $ 500
So, since the consolidated I\S is made so that it looks like as if both were the same company (single economic entity). The inventory will not be valued at $ 500 as because there is profit margin included in that figure , 25 % margin (500 * 25/125 = 100) , so we have to deduct $ 100 from the closing inventory of the subsidiary (500-100 = 400), ultimately 2000- 100 = 1900.
Deducting closing inventory means increasing cost of goods sold.
Parent (A) Subsidiary (B)
Sales 8500 10000
C.O.G.S
Opening Inv 2000 4000
Purchase 10000 5000
Closing Inventory (2000) 10000 (1900) 7100
Gross Profit 2500 2900