Downstream Sale: Intercorporate Investments

[swadhin]

Equity Method with Sale of Inventory: Downstream Sale

Jones Company owns 25% of Jason Company… [question removed by moderator]

Calculation of 16,000 understood as Jason has only sold 75% of the the inventory. But why again 25% of 16,000? Isn’t it all the profit after selling belongs to Jones? its a downstream transaction. Jones own 25% of Jason, not the other way around…Why would Jones bother sharing their profit with an investee? Isn’t the 64k of entire profit belongs to Jones? Had it been Jason sold that to Jones, then out of 64k profit of Jason, Jones could have claimed a 25% cut being a 25% shareholder!!!Isn’t it??

My ques is why would a parent company share its profit with an associate?

Might sound naive in posting that. Poor in FRA.

[S2000magician]

You multiply by 25% because 25% of the inventory is unsold, so the profit is not confirmed, and you multiply by 25% because Jones owns only 25% of Jason; so they’re entitled to only 25% of Jason’s profit.

[swadhin]

@S2000magician

You multiply by 25% because 25% of the inventory is unsold, so the profit is not confirmed, and you multiply by 25% because Jones owns only 25% of Jason; so they’re entitled to only 25% of Jason’s profit.

But here Jones are the ones who made profit by selling it to Jasons. Ain’t it? Where would Jason’s profit come from?

[S2000magician]

@swadhin

My ques is why would a parent company share its profit with an associate?

Jones makes wheels for donkey carts. Jason makes donkey carts.

Jones sells wheels to Jason at a profit.

Jason sells donkey carts at a profit.

They’re not sharing their profit with their associate. They’re making a profit on what they sell to the associate, and the associate is making a profit on what they sell to their customers.

[S2000magician]

@swadhin

@S2000magician

You multiply by 25% because 25% of the inventory is unsold, so the profit is not confirmed, and you multiply by 25% because Jones owns only 25% of Jason; so they’re entitled to only 25% of Jason’s profit.

But here Jones are the ones who made profit by selling it to Jasons.

I got that.

@swadhin

Ain’t it?

Yes.

@swadhin

Where would Jason’s profit come from?

From selling donkey carts.

[S2000magician]

The calculation for the amount of unrecognized profit is the same whether the sale is downstream:

Unrecognized profit = total profit × % unconfirmed × % ownership of affiliate

Here, total profit means the profit from the upstream or downstream sale.

[swadhin]

[quote=“S2000magician”]

@swadhin

They’re not sharing their profit with their associate. They’re making a profit on what they sell to the associate, and the associate is making a profit on what they sell to their customers.

I think i got it now. Because the similar nature of businesses, both of their prodcuts are instrumental in coming up with the end product for the customer. Thank you @S2000magician for making it simpler.

[Deal_Clincher]

Simple

If Jones would have sold it to a customer directly it would have realized 160-96 = 64

But as this one is logged in a subsidiary unless 100% of it gets sold from subsidiariy’s the parent won’t be able to realize the profit from the unsold portion.

Here ownership is 25%. Hence as the subsidiary keep selling the goods 64*.25 = 16 will start getting realized by the parent. Consider them together as a system now, with 48k profit belongs to parent and 16k unrealized profit belongs to the subsidiary.

[swadhin]

@Deal\_Clincher

Simple

If Jones would have sold it to a customer directly it would have realized 160-96 = 64

But as this one is logged in a subsidiary unless 100% of it gets sold from subsidiariy’s the parent won’t be able to realize the profit from the unsold portion.

Here ownership is 25%. Hence as the subsidiary keep selling the goods 64*.25 = 16 will start getting realized by the parent. Consider them together as a system now, with 48k profit belongs to parent and 16k unrealized profit belongs to the subsidiary.

Thank you. Appreciate the response.

[S2000magician]

[quote=“swadhin”]

@S2000magician

@swadhin

They’re not sharing their profit with their associate. They’re making a profit on what they sell to the associate, and the associate is making a profit on what they sell to their customers.

I think i got it now. Because the similar nature of businesses, both of their prodcuts are instrumental in coming up with the end product for the customer. Thank you @S2000magician for making it simpler.

You’re quite welcome.