Question

What the main purpose of the consolidation entries for intercompany sale of inventory and long term asset transactions. I hope you can clearly clarify this for me.

Answer 1

Intercompany transaction is a common thing in the real world. The main purpose of the consolidation entries for the intercompany sale of inventory is to eliminate Intercompany sales revenue and also eliminate the Cost of Goods sold. Now Second thing is Inventory Sold Between Intercompany which involve gross profit margin. If any ending inventory balance out of Inter-company sales is available at the end of the accounting year. recorded gain (I mean Gross profit margin to extent of Inventory value.) should be considered as unrealized gain and amount of unrealized gain should be eliminated by consolidation entries.

Let's Talk about consolidation entries for long term asset transaction. Asset of one company is sold to another company (both company interrelated) with some gain or loss. Now Company who purchased long term assets should record at cost value paid to Company (who sell the assets). Depreciation calculated by Purchasing a company based on its cost value. Cost value may include gain or loss on long term assets. Company might be record depreciation and assets cost value with gain or loss. Such difference for Depreciation expense and Gain or loss on transaction both are unrealized. the unrealized amount should be eliminated by applying consolidation entries for consolidation entries.

After applying consolidation entries for the intercompany sale of inventory and long term asset transactions, company should fairly record and eliminate unrealized gain or unrealized loss arise from the intercompany transaction.