I finally got a handle on the upstream transactions and removal of the unrealized profit from equity income, but the example on page 137 for downstream sales still doesn’t make sense. I don’t get the calculation behind the unrealized profit to be removed. Why is the initial gross profit of 64,000 reduced by .25 and then again by .25. I would understand the rationale behind exluding 16,000 as 25% had not yet been sold to a third party, but this is the investors gross profit so why would it be further reduced by their pro rata share of the associate.
Main point of this section is that investors and associates can influence the timing of transactions — THEREFOR profits can only be REALIZED when confirmed. When Jason finally sells that last 25% of inventory then that profit will be realized but right now it must be subtracted because it is unrealized profit.
Compare to Eg 5. 8000 profit but NONE has been sold yet. So this profit is unrealized for Wicker.
Eg. 6. 64000 profit and 120000/160000 of that 64000 will be realized(Proportionately at .25). So that would = 64000*.120000/160000*.25 = 12 000 of realized profit. The rest would be unrealized. Total amount of potential realized profit is 64000 * .160 000/160 000 * .25 = 16000.
Therefor unrealized profit would be 16000 -12000 = 4000.
I just did it a bit of a different way numerically so maybe you would understand better the logic.
I don’t have the specific question but I think I understand where you are coming from:
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Total profit on intercompany transfer = 64k
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Unconfirmed portion (i.e., portion not resold to 3rd party) = 25% of 64k = 16k
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Investor’s prorata share of the unconfirmed profits = 25% of 16k = 4k
The idea here is that you do not reverse the 12k worth of profit because that is the share of other investors (and they can reverse it on their financial statements if they deemed significant influence as well)
Okay guys thanks for the help but this is what I’m not getting. Why would I adjust the unrealized profit by my proportionate share? I sold something to you at a gross profit of 64,000. Totally get why I cannot claim this full amount until it is resold to a third party but, this 64,000 is my profit, not the profit to be obtained by you and then flowing back to me pro-rata as in upstream. Why then, would I not only exlude 16,000??? I’m waiting on you to resale and confirm the rest of MY 64,000 proft not for you to realize it and pass back some of it to me.
I’m not understanding your confusion. It seems like you have it. Somebody else on this board has to assist you on this.
Waiting on resale to confirm the rest of your 64000 is realizing it. Profits from transactions with associates can NOT be REALIZED until confirmed through sale to a third party.
I think you’re just making this more complicated then it is. When it comes to inventory there is no difference between how its dealt with upstream or downstream using the equity method other then the fact as to where the profit on the transaction is recorded (Either on the Associates IS or Investors IS). Thats it.
You know how to do the questions. There both done the same. Move on and stop killing yourself
This is your main question:
Why would I adjust the unrealized profit by my proportionate share?
Being a full actuary and math junkie I only understand this conceptually because I’m thinking of it mathematically. It’s a little difficult to explain but it is correct. But if I was an english minor I would have your back.
Hi cipherap15. I’ve read all your answer and i can understand alot from it. But i only have 1 question i do not understand? I understand why we exclude $4000 unrealized profit from equity income but why we do not include $12,000 realized profit on equity income? That’s all. Hope can receive your answer soon. Thank you
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I believe it’s just that the $12,000 is the 75% of profit that isn’t equity income because the investor only owns 25% of the investee. The investor only gets 25% of the $16,000 that was in question.