Upstream/Downstream Accounting

First the question: The California Wines owns 40% of a joint venture, Western Vineyards. Vineyard’s income statement for this period is as follows: Revenues: $10,000 Less: COGS=$7500 Gross Profit=$2,500 Less SG&A=$500 Operating Income =$2000 Less Interest Expense: $500 EBT=$1500 Less Tax=$600 Net Income=$900 California Wines purchases 30% of the output of Vineyard. The amount of COGS to be included under proportionate consolidation? The answer is $1800 because you subtract out revenues gained from downstream sales, so (.4)(7500) - (0.4)(0.3)(10000)=$1,800. The question is: why do you back out pro-rata earnings from COGS? I know why you do it for net income, but why subtract the revenue from inventory?

one man’s food is another man’s poison. Revenues from Sub = Part of COGS in parent.

Sorry I’m dense. I don’t understand what you mean. I get the use of the proverb I think, but do I subtract all the pro-rata shares of the revenue from each line item, for example, from interest expense, so (0.4)(500) - (0.4)(0.3)(10000)?

no there is no evidence that the interest exp. of the sub had any linkage to the interest expense of the parent. but Revenues (Sales) of Sub (Poison) are being used as Inventory in the Parent’s and hence will become part of COGS. (Food)