X is a Malaysian subsidiary of Y, located overseas. Y manufactures computers, which it sells to X and other associated distributors in different countries. The computers distributed by X bear company Y's trademark. X also provides technical support to all its customers.
|Cost of goods sold
|Margin (Net Loss)
Trading account for X
Assume that the CUP method is not applied as no reliable adjustments can be made to account for differences with similar products in the market; and the resale price method is not used as no comparable measurement of gross margin can be found due to differences in accounting practices amongst independent distributors. The TNMM is adopted on the basis of net profit return to sales. It was found that the net profit margin to sales earned in a comparable transaction by an independent person is 5%.
Adjustments on X will be as follows:
Net profit of X = 100,000 x 5% = 5,000
Adjusted cost of goods sold = 100,000 – 15,000 – 5,000 =80,000