Entity 1 Site A to Entity 3 Site D:Profit and Freight Cost Markup (Different Currency)

In this example, Entity 1, Site A transfers product to Entity 3, Site D, with both a profit and freight cost markup. The two entities are in different countries (in this example, the United States and Japan), and thus there is a need to employ a currency conversion rate. Here the conversion rate is assumed to be 190 Yen to the Dollar, and the actual cost of the product for Site A is $1.00, or 190 Yen.

The company has defined the seller as the Free On Board (FOB) owner, and has established a profit markup of cost plus 10%. This is established in a global pricing table.

Freight, duty, and brokerage are established as indicated below for Site A:

Note:  The entries shown below must be made to both sites at time of shipment.
Site A Journal Entries:    
  Credit Debit
InterEntity A/R   $1.10
  (Cost + 10% = Transfer Price)  
InterEntity C of S Matl   $0.50
InterEntity C of S Labor   $0.15
InterEntity C of S Fixed Ovhd   $0.20
InterEntity C of S Var. Ovhd   $0.15
InterEntity C of S Outside Serv   $0.00
InterEntity Sales $1.00  
InterEntity Profit $0.10 (Cost + 10% - Cost)  
Inv Matl $0.50  
Inv Labor $0.15  
Inv Fixed Ovhd $0.20  
Variable Ovhd $0.15  
Outside Serv $0.00  

This table shows the entries for Site D:

Site D Journal Entries:    
  Credit Debit
InterEntity Intransit Inv   Y205
  (Site D Actual Inventory Cost + Cost Markup of Freight, Duty, etc.)  
InterEntity Cost   Y19
  (Site A Cost + 10% - Site A Cost)  
InterEntity Val. Var.   $0.20
InterEntity C of S Var. Ovhd Y 0 (Site D Cost - Site A Cost - Cost Markup)  
InterEntity A/P Y 209 (Transfer Price)  
Freight Expense Y10  
Duty Expense Y3  
Brokerage Expense Y2  

When inventory is received by Site D:

Site A Journal Entries -- None

Site D Journal Entries    
  Credit Debit
Inv Matl   Y205
  (Site D Inventory Cost)  
InterEntity Intransity Inventory Y 205 (Site D Inventory Cost)