USA Intercompany Inventory Sales

[lg1224]

I have put together the attached sample case to see what your thoughts are on the treatment of the inventory for the US Entity. This example has to do with a foreign subsidiary purchasing inventory which it then turns around and sells to it's parent US company with a 10% markup for transfer pricing. I have been going back and forth with a buddy of mine on the treatment of the inventory balance for the US entity specifically, where he has been writing off the 10% markup which goes on the US books against US COGS and thus overstating the true monthly COGS and understating Inventory. My argument is that the scenario needs to be viewed from a consolidated basis where the 10% markup gets eliminated for inventory and thus inventory is represented at cost while the US has to reflect the inventory at the amount it was billed by the foreign entity, not the foreign entities cost to acquire the inventory. His concern is that with each month the US inventory balance will continue to grow by the 10%.

 

[kirby]

1. You are correct. His actions send an intercompany account to become a real expense, improperly reducing your company's equity.
2. His concern would only be an issue (but still not valid) if the US Entity NEVER sold any of the inventory purchased from the sub.
3. Since he has goofed the intercompany accounting it is likely that the Consolidation accountants are making the wrong elimination entry when they look at the combined accounts.
4. So how are you going to stop this?

 

[Werner Reisacher]

You might find this PP presentation useful:

https://www.ocf.berkeley.edu/~cchang/pdf%20docs/ch007.pdf