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) |