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Inventory in Transit - Example

On 1 January 2018, Buy Ltd acquired control of Sell Ltd. Throughout 2018, Sell Ltd sold inventory to Buy Ltd, including R5,000 of inventory still in transit at year end. To prepare the consolidated financial statements: 1) Buy Ltd records the purchase of R5,000 of inventory in transit. 2) Intragroup sales of R85,000 are eliminated from revenue and cost of sales. 3) Unrealised profit of R6,750 in Buy Ltd's closing inventory is eliminated.

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118 views

Inventory in Transit - Example

On 1 January 2018, Buy Ltd acquired control of Sell Ltd. Throughout 2018, Sell Ltd sold inventory to Buy Ltd, including R5,000 of inventory still in transit at year end. To prepare the consolidated financial statements: 1) Buy Ltd records the purchase of R5,000 of inventory in transit. 2) Intragroup sales of R85,000 are eliminated from revenue and cost of sales. 3) Unrealised profit of R6,750 in Buy Ltd's closing inventory is eliminated.

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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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INVENTORY IN TRANSIT

The concept of inventory in transit has already been covered in FAC2602.


However in order to assist you, please find an additional example below that you can work
through.

On 1 January 2018, Buy Ltd acquired control over Sell Ltd by acquiring 80% of the issued
ordinary shares of Sell Ltd.
On 1 January 2018, Sell Ltd started selling inventory to Buy Ltd at a profit mark-up of 25% on
the selling price. At 31 December 2018, Buy Ltd had inventories of R22 000 in its separate
accounting records that were purchased from Sell Ltd.
On 29 December 2018, Sell Ltd invoiced Buy Ltd R 5 000 for inventories. These inventories
were still in transit from Sell Ltd to Buy Ltd at year end. Sell Ltd recorded the sale of these
inventories in its separate financial statements. At 31 December 2018, the R5 000 was included
in the ‘trade and other receivables’ of Sell Ltd. Buy Ltd has not yet recorded the purchase of
these inventories or the related trade payable in its separate accounting records at year end.
During the current year, purchases from Sell Ltd in the accounting records of Buy Ltd amounted
to R80 000.
REQUIRED:

Prepare the pro-forma consolidation journal entries of the Buy Ltd Group for the year ended
31 December 2018 relating only to the intragroup sales of inventories from Sell Ltd to Buy Ltd.

LECTURER’S COMMENTS
We cannot eliminate the intragroup sale of inventories between Sell Ltd and
Buy Ltd unless all sales and purchases have been correctly recorded in both
entities accounting records at year end.

As stated in the given information, Sell Ltd has already correctly accounted for
the sale of the inventory, which is still in transit at year end, in its separate
accounting records. Sell Ltd would have accounted for the sale as follows:

Dr Cr
29 December 2018: R R
Trade and other receivables 5 000
Sales 5 000
Accounting for the sale of inventory
29 December 2018:
Cost of sales 3 750
Inventory 3 750
Accounting for cost of sales of inventory(5 000 x 75/100)

Buy Ltd has however not yet accounted for these inventories in its separate
accounting records at year end. Therefore the first step, before the
consolidation process begins, is to make sure that we account for the
purchase of the inventories in transit in the accounting records of Buy Ltd.
JOURNAL ENTRY TO ENSURE THAT THE PURCHASE OF THE INVENTORY IN TRANSIT
HAS BEEN ACCOUNTED FOR:
Dr Cr
R R
Inventory 5 000
Trade and other payables 5 000
To account for the inventory and related trade payable

LECTURER’S COMMENTS
Now that the purchase and sale of the inventory has been correctly recorded
in both Buy Ltd and Sell Ltd, we can eliminate the intragroup sales between
Buy Ltd and Sell Ltd.
From the given information, the total purchases from Sell Ltd in the accounting
records of Buy Ltd amounted to R80 000. It is important to remember that Buy Ltd
has not yet accounted for the inventories of R5 000 that are still in transit.
Therefore, the total purchases that need to be eliminated when preparing the
consolidated financial statements amount to R80 000 + R5 000 = R85 000.
From the given information, the closing inventory purchased from Sell Ltd in the
accounting records of Buy Ltd is R22 000. Once again, it is important to
remember that Buy Ltd has not yet accounted for the inventories of R5 000 that
are still in transit. Therefore, the unrealised profit that needs to be eliminated when
preparing the consolidated financial statements is 25/100 x 27 000(22 000 + 5 000)
= 6 750.

PRO-FORMA CONSOLIDATION JOURNAL ENTRIES FOR THE BUY LTD GROUP FOR
THE YEAR ENDED 31 DECEMBER 2018:
Dr Cr
R R
Revenue 85 000
Cost of sales 85 000
To eliminate the total intragroup sales for the year
(80 000 + 5 000)

Cost of sales 6 750


Inventory 6 750
To eliminate the unrealised profit in closing inventories
(27 000(22 000 + 5 000) x 25/100)

Deferred tax 1 890


Income tax 1 890
Tax effect of the elimination of unrealised profit in
closing inventory (6 750 x 28%)

Trade and other payables 5 000


Trade and other receivables 5 000
To eliminate the intragroup payable/receivable

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