Per the textbook, no official FASB guidance exists on the assignment of income e

Question

Per the textbook, no official FASB guidance exists on the assignment of income effects on non-controlling interest in the consolidation process, when either the parent transfers a depreciable asset to the subsidiary or vice versa. Suggest one (1) method of accounting for the income effects on the non-controlling interest that you consider most appropriate. Provide a rationale for your response. Assume that company P (parent) uses the equity method to account for its investment in company S (subsidiary). Company P purchases inventory items from company S. According to FASB’s guidance, the accountant must remove the inter-company profit from Company S’s net income. Determine if the process permanently eliminates the profit from the non-controlling interest or merely shifts the profit from one period to the next. Provide support for your rationale.

Explanation / Answer

Subsidiary sold goods to Parent. It is an upsream transaction ie from subsidiary to parent.

In a consolidated income statement elimintae revenue and cost of goods sold arising from the above transaction

In consolidated balnce sheet eliminate intercompany payable and receivables.

For Example. S sold goods to P for Rs. 10,000

                     S recorded sale as 10,000

                     P recorded cost of goods sold 10,000

S acquired this goods for 7,000. It means S deriving a profit of 3,000 from inter company sales.

The question of removing profit is arise only if the inventory is still lying with P.

If P sold the same to third party for Rs. 12,000 no need to eliminate profit of inter company transaction.

We have to eliminate the transaction by removing the sale and cost of goods sold in consolidated income statement. ie deduct 10,000 from sales and 10,000 from cost of goods sold.

Now analyse the transaction. Purchse by S from third party 7,000

                                              Sold to       P by S              10,000

                                               Purchase from S by P    10,000

                                              Resale by P to third party      12,000

We eliminate inter company sale and purchase of 10,000. The net effect will be S purchase cost 7,000

                                                                                                                              Sale by       P 12,000

                                                                                                                            Profit            5,000

But if the inventory is held by P. We should eliminate the proft. ie S record a profit of 3,000 on this sale but that is actually not received. It is just postponding of revenue recognition till the sale to third party taken place.

    we have to remove 10,000 from sales    7,000 from cost of goods sold and 3,000 from inventory. We can recognise the profit once it is sold to a third party.

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