cpk, the reason I question that is if a company creates a subsidiary of some sort, and then start dumping its inventory on it, it would continually make bogus profits of $48k (as in this example). But I guess that’s not what’s being addressed here. It seems that the deduction made against the parent’s equity income is meant to offset only part of the gain.
if a company did that - it is NOT AN ARMS LENGTH TRANSACTION. So the entire 64K would then be removed completely - since you would eliminate intercompany transactions in entirety. That is why the “Arms length”, “above-board” transaction is important.
Dreary, Realize in this case, that whatever Jones sells to Jason, 75% of profit is realized immediately, as selling to Jason, is similar to selling to Chuck, except for 25% stake that Jones have in Jason, which reduces the profit to only 75% of actual profit. 96k sold for 160k, in normal circumstances any company would realize a profit for 64k. But jones selling to jason only realize 48k immediately. and defers 16k upon Jason’s sale of that inventory. and this 48k is NOT BOGUS PROFIT. its actual profit to Jones, whether jason sells that inventory or not it doesn’t matter. 48k is realized as soon as payment goods leave Jone’s warehouse. But for accounting purpose it seems like our book realized 64k immediately and then decided to deduct unrealized gain due to jason’s left over inventory and that has the same effect. as i) realzing 48k and adding as and when jason sells inventory OR ii) realzling 64k and deducting as and when jason fails to sell that inventory. effectively profit can’t be realized for more than 64k unless jason sells the goods at profit as well. In our example jason is selling goods at the cost price
yeah, it’s all clear now, and makes sense too, which was pointed out earlier by someone here…if they own 75% then immediately recognize 75% of the profit, and recogize the rest when sold (practically that’s what happens). In accounting terms, it could’ve been recorded on the I/S as sales - COGS, etc, and then show Equity Income = $16k (assuming Jason sold all). pepp wrote: > effectively profit can’t be realized for more than 64k unless jason sells the goods at profit as well. In our example jason is selling goods at the cost price. I agree, if Jason sold the goods for a larger profit, then Equity Income would get the $16k due, plus the additional profit from selling these goods *and* any other goods or services Jason sold.