Could anyone help me understand why we only regonize the percentage of ownership in the investee company when the investor makes a sales to a third party?
Say we own 30% of one company, when that company sells a widget and then we sell this widget to a external third party, we only recognize 30% of the profit on this widget.
This does not make sense to me.
Thanks again
We recognize only 30% of the the profit on the subsidiary’s sale to us.
We recognize 100% of our profit when we sell it.
I do not understand why we reduce equity income (during an upstream transaction) by proportion of ownership in the company.
This is basically saying that we are looking to reduce our equity income if we own more of the subsidary company. Shouldn’t it be the opposite way around (reduce equity income by proportion of ownership you do NOT own in the subsidary company)?
The upstream/downstream problems usually state that only a portion of the inventory was sold, therefore, the whole profit cannot be recognized from the equity position. This isnt stated anywhere in your problem as you assume 100% of upstream was successfully sold. Thefefore, you get 30% of the profits coming from the equity position because you only own 30% of the company.
As magi already said, you get 100% of our profit.
We reduce it only until we sell the product to a third party.
The reason is that we’re trying to prevent fraud. Sub sells to parent at $100. Parent sells back to sub at $200. Sub sells back to parent for $300, parent to sub for $400, and sub to parent to sub for $500. A bunch of fraudulent transactions trying to pump up profits.
Until the parent sells to a third party for $600, the parent doesn’t get to show any of the sub’s profit from that series of transactions.