[Anonymous]

I don’t know how better to explain this, other than I just can’t get it. It is literally the only item in all 9 sections that I can’t get down. I’ve listened to the lecture, looked at ninja notes, and keep re-working the problems and I just can’t wrap my head around it. Anyone have any tips on intercompany inventory/cogs items? I’d really appreciate it. What do you eliminate – what do you keep? What if the sub sells all the inventory, what if it doesn’t – etc? It’s so weird because I understand I/C receivables and sale of assets totally.

Thanks again.

[Mikey89]

I'm not really sure how to do this, but IMHO, it is a waste of time studying this for the CPA exam. Your time is spent better on other topics.

Reg 4/18/12 78
Far 7/30/12 74, 74, 75
Bec 11/11/12 74, 78
Aud TBD 51, 71, XX

[Mikey89]

Let me clarify, you should know the basic about business combos, but I doubt that you will need an in depth knowledge about how to calculate the inventory like you want to learn.

Reg 4/18/12 78
Far 7/30/12 74, 74, 75
Bec 11/11/12 74, 78
Aud TBD 51, 71, XX

[Anonymous]

The only way I could remember it was by thinking of the sale between the the company and its sub as “fake”

Company A sells $70 of stuff to company B, it's sub, for $100. Company B sells the stuff to Company C, which is unaffiliated, for $150.

So, first, the sale from A to B was fake, so undo it by debiting sales revenue:

Sales 100

Second, A's COGS is “fake” because it all got included in B's COGS. So undo it by crediting COGS:

COGS 70

Now you need 30 to balance. The 30 is credited to Inventory because B's inventory was inflated by the “fake” sale from A, (which should have made life easier for us all by transferring the inventory to B at cost instead!) So credit Inventory 30

Inventory 30

This is called “unrealized inventory profits” in textbook terminology.

If A sold the stuff to B at cost (70), all you would do to consolidate is:

Sales 70

COGS 70

to get rid of the “fake” sale and the “fake” COGS.

The cash takes care of itself, so any answer saying you have to adjust the cash account is wrong.

[Anonymous]

Totally a waste of time…just know you only count sales to outside entities, everything else has to go back as if it had never happened…

[PistolPete]

I disagree. Just because it wasn't on your exam doesn't mean that its a waste of time. It's an important topic and I was hit with business combinations hard.

FAR - 68, 79
AUD - 82
REG - 71, 71, 80
BEC - 76

CMA
Part 1: October 2013
Part 2: January 2014

[Anonymous]

Thanks, dianepage. I guess the part where I get confused is what to do when, at year end, some of the IC inventory was sold to unaffiliated parties, while some were still on the books.

[Anonymous]

@cake321…you also need to pro rate the inventory if some portion of it was sold/unsold. For the sold portion, you need to adjust COCS. For the unsold portion, you need to adjust Inventory. To sum it in a simply way, using Dianepage's example, when A sold stuffs to B, it creates three things: 1). Fake Sale(profile) to Company A, 2). Fake(Make-up) in inventory for company B. 3) Fake Inter-company payable and receivable. The objectives of adjustments are to get rid of all three things. If you read your Becker Book, pay attention to which J/E pertain to which company A or B, you will get a better clear idea.

[Author]

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