USA Intercompany elimination - US GAAP


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I am an auditor, and I am trying to resolve a question I have about the way our client performs intercompany eliminations. They eliminate intercompany sales, and they eliminate the same amount from COGS, essentially leaving a credit in COGS (which I guess represents Gross profit on intercompany sales). T

hey also perform a separate exercise to eliminate gross profit from inventory at each quarter end. They do this by checking how much inventory on hand relates to intercompany at quarter end, and multiply this inventory balance with the gross margin % to arrive at Profit in inventory. This profit in inventory is also eliminated; that is the inventory is written down in the balance sheet amount by this profit amount.

Is this all the Company needs to do? in other words, is their approach correct? I'm confused because in the Income statement, I see Gross margin related to intercompany that still exists in COGS as a credit balance because of the way they do it. Also, please not that the inventory write down in the balance sheet does not equal this credit that remains in COGS.

Any help would be much appreciated !
 
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kirby

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Eliminating the same amount from SALES and COGS is only Ok if they do NOT add any intercompany profit to the intercompany sale. TEST that by looking at a few detail transactions. If there IS profit added to interco sales then the elim CANNOT be the same number for both. Roll up your sleeves and do the t-accounts to figure this out using examples. Example: assume Co A buys inventory for $100 then sells to Co B for $175 Now figure out the eliminating entries that will wipe every internal sale figure out in consolidation. Working out the theory will show you what to look for.
 

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