| Course | ACC-6020 Advanced Accounting |
|---|---|
| Module | Module 4 |
| Paper type | Written Assignment 4: intercompany sale of inventory, downstream and upstream |
| Length | About 738 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | M.S. in Management in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6020 Module 4
Profit That Has Not Left the Family: Eliminating Downstream and Upstream Inventory Sales Between Ridgewood and Lakeland
Student Name
M.S. in Management in Accounting, Thomas Edison State University
ACC-6020: Advanced Accounting
Mentor Name
Month Day, Year
Profit That Has Not Left the Family: Eliminating Downstream and Upstream Inventory Sales Between Ridgewood and Lakeland
Introduction
When one member of a consolidated group sells inventory to another, the seller records a sale and a profit, but the group as a whole has sold nothing until the goods leave the group. Consolidated statements must remove the intercompany sale and any profit remaining in the buyer's inventory (Jeter & Chaney, 2011). The direction of the sale matters when the subsidiary is not wholly owned, because profit recorded by the subsidiary belongs partly to the noncontrolling interest.
The amount to defer is the seller's gross profit on goods still held by the buyer at year end, so the analysis needs each seller's markup and the cost of unsold intercompany goods.
The 2027 Transactions
Neither company held intercompany goods at the start of 2027, so there is no beginning inventory profit to recognize this year.
| Sale | Seller's cost | Price | Seller's gross profit | Share unsold at year end | Unrealized profit |
|---|---|---|---|---|---|
| Downstream: Ridgewood sells gauge housings to Lakeland | $600,000 | $800,000 | $200,000 | 25% | $50,000 |
| Upstream: Lakeland sells pressure sensors to Ridgewood | 300,000 | 450,000 | 150,000 | 40% | 60,000 |
Worksheet Eliminations for 2027
The first entry in each pair removes the intercompany revenue and the matching cost, which leaves consolidated gross profit unchanged but prevents revenue from being counted twice. The second entry reduces ending inventory to the group's original cost and raises cost of goods sold, deferring the profit.
| Entry | Debit | Credit |
|---|---|---|
| Eliminate downstream sales | Sales 800,000 | Cost of goods sold 800,000 |
| Defer downstream profit in ending inventory | Cost of goods sold 50,000 | Inventory 50,000 |
| Eliminate upstream sales | Sales 450,000 | Cost of goods sold 450,000 |
| Defer upstream profit in ending inventory | Cost of goods sold 60,000 | Inventory 60,000 |
Who Bears the Deferral
Downstream profit was recorded by Ridgewood, the parent, so the $50,000 deferral reduces only the controlling interest's income. Upstream profit was recorded by Lakeland, so the $60,000 deferral reduces Lakeland's income before it is divided: the noncontrolling interest bears 20%, or $12,000, and Ridgewood 80%, or $48,000.
In numbers, the noncontrolling interest's share of 2027 income falls by $12,000, 20 percent of the $60,000 upstream deferral, while the controlling interest absorbs the other $48,000 along with the full $50,000 downstream deferral, $98,000 in all.
| Lakeland's adjusted income, 2027 | Amount |
|---|---|
| Lakeland's reported net income | $1,000,000 |
| Step-up write-offs: buildings $60,000, patents $100,000, customer lists $50,000 | (210,000) |
| Lakeland's profit still in Ridgewood's year-end stock | (60,000) |
| Adjusted subsidiary income | 730,000 |
| Noncontrolling interest's 20% share | $146,000 |
| Ridgewood's 80% share | $584,000 |
Consolidated Net Income
The deferrals change only timing. Over 2027 and 2028 together, consolidated income includes all of the intercompany profit, but only once the goods have been sold outside the group, which is the point of the elimination.
| 2027 | Amount |
|---|---|
| Ridgewood's separate income from its own operations | $2,700,000 |
| Less unrealized downstream profit | (50,000) |
| Lakeland's adjusted income | 730,000 |
| Consolidated net income | 3,380,000 |
| Attributable to the noncontrolling interest | (146,000) |
| Attributable to Ridgewood's shareholders | $3,234,000 |
Realization in 2028
In 2028 both companies sold the remaining intercompany goods to outside customers. The deferred profit is now realized and moves into consolidated income through beginning inventory.
The upstream realization raises Lakeland's adjusted 2028 income by $60,000, so the noncontrolling interest's share of 2028 income includes $12,000 of profit deferred from 2027. Over the two years, the group recognizes exactly the profit it earned from outside customers, and the noncontrolling interest shares only in profit Lakeland earned.
| Entry, 2028 | Debit | Credit |
|---|---|---|
| Downstream profit realized | Investment in Lakeland or Ridgewood's retained earnings 50,000 | Cost of goods sold 50,000 |
| Upstream profit realized | Retained earnings, Lakeland 48,000; Noncontrolling interest 12,000 | Cost of goods sold 60,000 |
Why the Rule Matters
Intercompany sales are a known channel for managing earnings. Thomas et al. (2004) found that Japanese parent companies used sales to affiliates to manage reported earnings toward targets, which is precisely the effect consolidation eliminations are designed to remove. Eliminating unrealized profit ensures that a group cannot raise its income by shipping goods between its own entities at year end (Financial Accounting Standards Board [FASB], 2007).
The full profit is eliminated even when a noncontrolling interest exists, so consolidated inventory is always carried at the group's original cost; only the attribution of the deferral between owners depends on the direction of the sale. Groups that sell large volumes internally usually track intercompany inventory in their consolidation software so the deferral can be measured at each period end.
References
Financial Accounting Standards Board. (2007). Noncontrolling interests in consolidated financial statements (Statement of Financial Accounting Standards No. 160).
Jeter, D. C., & Chaney, P. K. (2011). Advanced accounting (5th ed.). John Wiley & Sons.
Thomas, W. B., Herrmann, D. R., & Inoue, T. (2004). Earnings management through affiliated transactions. Journal of International Accounting Research, 3(2), 1-25. https://doi.org/10.2308/jiar.2004.3.2.1
ACC 6020 Module 4 instructions, in plain terms
Inventory sold between parent and subsidiary, in both directions, fills the fourth written assignment. Expect to eliminate intercompany sales and purchases, defer unrealized profit in ending inventory, recognize deferred profit from beginning inventory, distinguish downstream from upstream sales and compute the noncontrolling interest's share of income when profit sits with the subsidiary. Problems may give markups on cost or gross profit rates on sales, so read carefully. The scenario is a teaching composite; they continue the invented parent and subsidiary, so amortization figures come from earlier assignments. Some versions add a third sale between subsidiaries to test the same reasoning. Prompts usually give sales between the companies, the markup and how much stock remains unsold at year end, in both directions.
How the ACC 6020 Module 4 example is put together
The introduction states the principle and why direction matters. A table sets out both intercompany sales with the unrealized profit in each. The elimination entries come in pairs, sales then profit, with an explanation of what each pair corrects. A section assigns the downstream deferral to the parent alone and the upstream deferral to both owners, then computes the subsidiary's adjusted income and its split. Consolidated net income is built and attributed in a second table. The realization section shows the 2028 entries for beginning inventory and explains the two-year result, and a closing paragraph cites research on affiliated sales as a tool for managing earnings.
ACC 6020 Module 4 rubric: what earns full marks
Intercompany inventory problems are scored as one of the nine assignments worth 50 percent together. Mentors check that sales inside the group are removed in full, then whether unrealized profit is figured on the right base and only on goods still in the group, that downstream deferrals reduce only the parent's income while upstream deferrals reduce the subsidiary's income before the noncontrolling interest's share, and that beginning inventory profit is recognized the following year. Consolidated net income should be attributed correctly. Explaining why direction matters shows understanding beyond the entries. Showing the deferral this year and the realization next year side by side demonstrates that the profit is moved in time, not removed. Allocating the deferred profit to the noncontrolling interest only for upstream sales is the distinction checked most often.
ACC 6020 Module 4 help from the desk
The most frequent errors on this assignment are eliminating only the profit and not the sales, computing unrealized profit on all intercompany goods rather than those still unsold, and charging an upstream deferral entirely to the parent. Check whether the problem gives markup on cost or gross profit on sales before computing. Ask who recorded the profit: the parent for downstream, the subsidiary for upstream. Remember the following year's entry for beginning inventory. Note the direction of each sale before allocating anything to the noncontrolling interest. A free first sample of your own ACC-6020 Module 4 problems is available on request.
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ACC 6020 Module 4 questions, answered
Where can I find a free ACC 6020 Module 4 sample paper?
The Ridgewood and Lakeland inventory assignment is reproduced above: downstream and upstream eliminations, the noncontrolling interest's share of the upstream deferral, consolidated income and the next year's realization.
What is the difference between downstream and upstream intercompany sales?
Downstream sales go from parent to subsidiary, so deferred profit affects only the parent; upstream sales go from subsidiary to parent, so the noncontrolling interest shares in the deferral.
How is unrealized intercompany profit calculated?
The seller's gross profit on intercompany goods that remain in the buyer's ending inventory at year end.
Why are intercompany sales eliminated in full?
Because the group has not sold anything to outsiders, so both the intercompany revenue and the matching cost of goods sold must be removed.
When is deferred intercompany profit recognized?
When the goods are sold to customers outside the consolidated group, usually through a beginning inventory entry the next year.