Title: Chapter Five
1Chapter Five
Consolidated Financial Statements Intercompany
Asset Transactions
2Intercompany Inventory Transactions
- Transactions between the parent and subsidiary
are viewed as internal transactions of a single
economic entity. - The effects of those transactions should be
eliminated from the consolidated financial
statements.
3Intercompany Inventory Transactions
- ENTRY TI
- On the consolidation worksheet, eliminate ALL
intercompany sales/purchases of inventory. - The elimination amount is the -amount assigned
as the sales price of the transfer.
Purchases component of COGS.
4Unrealized Inventory GainsYear of Transfer
- ENTRY G
- Despite Entry TI, ending inventory is still
overstated by the amount of gain on the inventory
that is still unsold at year end. - We must eliminate the unrealized gain as follows
Ending Inventory component of COGS.
5Unrealized Inventory GainsYear Following Year of
Transfer
- ENTRY G
- If the inventory was sold during the year, the
gain is now in Retained Earnings and must be
moved back to Income.
6Unrealized Inventory GainsYear Following Year of
Transfer
- ENTRY G
- If the transfer of inventory is DOWNSTREAM if
the parent uses the Equity Method, then the
following entry is used to recognize the
remaining unrealized profit left at the end of
the previous year.
7Inventory TransfersExample
- On April 5, 2005 World Co (parent) buys 1,000
widgets from Sub, Inc. for 500,000. The widgets
originally cost Sub, Inc. 400,000. - At year-end on December 31, 2005, World Co. still
had 250 of the units on hand. - Record the consolidation entries on 12/31/05 to
eliminate the unrealized gain.
8Inventory TransfersExample
First, the entire intercompany transfer must be
eliminated.
9Inventory TransfersExample
10Unrealized Inventory GainsEffect on
Noncontrolling Interest
- If the transfer is DOWNSTREAM, then any resulting
unrealized gain belongs to the parent. - No effect on Noncontrolling Interest
- If the transfer is UPSTREAM, then any resulting
unrealized gain belongs to the subsidiary. - Noncontrolling Interest must be adjusted for the
unrealized gain.
11Unrealized Inventory GainsEffect on
Noncontrolling Interest
Noncontrolling Interest in Sub Net Income the
noncontrolling of the subs net income, AFTER
eliminating UPSTREAM unrealized intercompany
profit.
12Intercompany Land TransfersEliminating
Unrealized Gains
- ENTRY TL
- If land is transferred between the parent and sub
at a gain, the gain is considered unrealized and
must be eliminated. - By crediting land for the same amount, this
effectively returns the land to its carrying
value on the date of transfer.
13Intercompany Land TransfersEliminating
Unrealized Gains
- ENTRY GL
- As long as the land remains on the books of the
buyer, the unrealized gain must be eliminated at
the end of each fiscal period. - The original gain appeared on last periods
income statement. Now, the gain resides in R/E.
Therefore, when we eliminate the gain, it must
come from R/E.
14Intercompany Land TransfersEliminating
Unrealized Gains
- ENTRY GL (Year of sale)
- In the year of disposal, modify the entry GL, so
that the unrealized gain must be eliminated one
more time, and also recognized as a REALIZED gain
in the current periods consolidated financial
statements.
15Land TransfersExample
- On June 25, 2004 World Co. (parent) sells a 30
acre tract of land originally costing 600,000 to
Sub, Inc. for 750,000. - At year-end on December 31, 2006 Sub Inc. still
owns the land. - Record the appropriate consolidation entry on
12/31/06.
16Land TransfersExample
This entry must be made at the end of each year
as long as the land is still on the books.
17The Effect of Land Transfers on Noncontrolling
Interests
If the transfer is DOWNSTREAM, there is no effect
on noncontrolling interest.
18Intercompany Transfer of Depreciable Assets
- ENTRY TA
- In the year of transfer, the unrealized gain must
be eliminated and the assets restated to original
historical cost.
19Intercompany Transfer of Depreciable Assets
- ENTRY ED
- In addition, the buyers depreciation is based on
the inflated transfer price. The excess
depreciation expense must be eliminated.
20Intercompany Transfer of Depreciable Assets
- In Years Following the Year of Transfer
- The equipment is carried on the individual books
at a different amount than on the consolidated
books. - These amounts change each year as depreciation is
computed. - To get the worksheet adjustments, compare the
individual records to the consolidated records.
21Intercompany Transfer of Depreciable Assets
- Big Wheel Trucking (BWT) owns 80 of Quick
Delivery, Inc. On 1/1/04, Quick Delivery has a
truck on the books with an original cost of
100,000, and accumulated depreciation of 60,000
(4 year remaining useful life, 0 salvage value,
straight-line). - Quick Delivery sells the truck to BWT for
80,000. - Analyze the information in preparation for making
entries on 12/31/05.
22Intercompany Transfer of Depreciable Assets
- On BWTs books, the annual depreciation 80,000
4 yrs. 20,000 per year. - The 1/1/05 R/E effect the original gain of
40,000 on Quick Deliverys books less 1 year of
depreciation.
23Intercompany Transfer of Depreciable Assets
- For the consolidated entity, the annual
depreciation 40,000 remaining BV 4 yrs.
10,000 per year. - The Acc. Depr. At 12/31/05 60,000 accumulated
depreciation at 1/1/04 2 years of depreciation.
24Intercompany Transfer of Depreciable Assets
- The consolidation worksheet adjustments appear in
the last column.
25Intercompany Transfer of Depreciable Assets
- ENTRY TA (Subsequent Years)
- The adjustment to fixed assets and depreciation
expense must be made in each succeeding period.
The entry for the BWT/Quick Delivery
Consolidation is
26Intercompany Transfer of Depreciable Assets
- ENTRY ED (Subsequent Years)
- In addition, we must adjust for the difference in
Depreciation Expense on the two income
statements. The entry for our example is
27End of Chapter 5
Hey, Chester, ol buddy! Im thinkin we need
to switch desks in a little intercompany
transfer.