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Chapter 8 PowerPoint PPT Presentation


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Chapter 8 . Consolidated Financial statements: Intercompany Transactions . Objectives of the Chapter. To discuss the accounting and working paper eliminations for related party transactions between a parent company and its subsidiaries for: - PowerPoint PPT Presentation

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Chapter 8

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Chapter 8 l.jpg

Chapter 8

Consolidated Financial statements: Intercompany Transactions


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Objectives of the Chapter

  • To discuss the accounting and working paper eliminations for related party transactions between a parent company and its subsidiaries for:

  •  I. intercompany transactions not involving profit or loss such as loans on promissory notes, leases of property under operating leases and rendering of services;

Consolidated FS-Intercompany Transactions


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Objectives of the Chapter (Contd.)

  • II.intercompany transactions involving profit or loss such as intercompany sale of merchandise, plant assets, intangible assets and leases of property (under capital/sales-type leases).

Consolidated FS-Intercompany Transactions


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Principle to follow to account for the intercompany transactions for the consolidated financial statements:

  • The consolidated financial statements should include only transactions resulting from the consolidated group’s dealings with outsiders.

Consolidated FS-Intercompany Transactions


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Principle to follow to account for the intercompany transactions for the consolidated financial statements: (Contd.)

  • Separate ledger accounts are established for all intercompany assets, liabilities, revenue and expenses.

  • These separate accounts clearly identify the intercompany items that should be eliminated in the preparation of consolidated financial statements.

Consolidated FS-Intercompany Transactions


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I. Accounting for Intercompany Transactions Not Involving Profit (Gain) or Loss

  • loans on Notes or Open Accounts

    • The parent company may make loans to its subsidiaries.

    • The interest rate charged by the parent company usually exceeds the parent company’s borrowing rate.

Consolidated FS-Intercompany Transactions


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I. Accounting for Intercompany Transactions Not Involving Profit (Gain) or Loss (Contd.)

  • Intercompany ledger accounts are used by the parent and the subsidiary to account for these intercompany transactions in order to differentiate intercompany loans and loans with outsiders.

Consolidated FS-Intercompany Transactions


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Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary)

  • Assume that Palm Corp. made the following cash loans to its wholly owned subsidiary, Starr Company, on promissory notes:

Consolidated FS-Intercompany Transactions


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Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)

  • Palm Corp. and Starr Company will use the following ledger accounts to record the foregoing transactions (assuming all notes were paid by Starr when due):

Consolidated FS-Intercompany Transactions


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Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)

Consolidated FS-Intercompany Transactions


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Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)

  • In the working paper for consolidated financial statements for Palm and subsidiary for the year ended 12/31/2001, the foregoing ledger accounts appear as shown below:

Consolidated FS-Intercompany Transactions


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Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper for Consolidated Financial Statements

  • For Year Ended December 31, 2001

*45,000 + $1,100 = $46,100

Consolidated FS-Intercompany Transactions


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Discounting of Intercompany Notes

  • If an intercompany note receivable is discounted at a bank (by the payee, i.e., Palm in example 8.1), the note becomes payable to an outsider – the bank.

  • Therefore, discounted intercompany notes are not eliminated in the working paper.

Consolidated FS-Intercompany Transactions


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Example 8.2: Discounting of Intercompany Notes

  • Continued with Example 8.1 and Assumed that on 12/1/2001, Palm had discounted at a 12% discount rate the $24,000 note receivable from Starr. Palm would record the following entry:

  • Cash 23,940

  • Interest Expense

  • ($1,260 discount – 1,000*)260

  • Intercompany Notes Receivable24,000

  • Intercompany Interest Revenue 200

  • ($24,000 x 0.10 x 1/12)

Consolidated FS-Intercompany Transactions


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Example 8.2: Discounting of Intercompany Notes (Contd.)

*Interest on note that accrues to discounting bank during discounting period.

Consolidated FS-Intercompany Transactions


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Example 8.2: Discounting of Intercompany Notes (Contd.)

  • Palm should inform Starr of the discounting. Starr would prepare the following journal entry on 12/1/2001:

Consolidated FS-Intercompany Transactions


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Example 8.2: Discounting of Intercompany Notes (Contd.)

  • Under the note discounting assumption, the ledger accounts related to the intercompany notes would appear in the 12/31/2001 working paper for consolidated financial statements as follows:

Consolidated FS-Intercompany Transactions


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Example 8.2: Discounting of Intercompany Notes (Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper for Consolidated Financial Statements

  • For Year Ended December 31, 2001

*$200 less than in illustration on page 348 because $24,000 discounted note earned interest for one month rather than two months.

† $21,000 note dated Sept. 1, 2001, plus $700 accrued interest.

Consolidated FS-Intercompany Transactions


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Leases of Property under Operating Leases

  • When both the parent and subsidiary account the lease as an operating lease, the lessee will record the lease payment as intercompany rent expense, while the lessor will record the lease payment received as intercompany rent revenue.

Consolidated FS-Intercompany Transactions


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Leases of Property under Operating Leases (Contd.)

  • For an intercompany operating lease, there is no profit or loss involved.

  • The inercompany rent revenue would be offset against intercompany rent expense in the manner similar to the offset of intercompany interest revenue and expense illustrated earlier.

Consolidated FS-Intercompany Transactions


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Rendering of Services

  • One affiliate may render services to another and result in intercompany fee revenue and expense (i.e., management fee charged to subsidiaries by a parent company).

Consolidated FS-Intercompany Transactions


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Rendering of Services (Contd.)

  • The intercompany fee revenue and expense are offset in the working paper.

  • Both the parent company and the subsidiary should record the fee billing in the same accounting period.

Consolidated FS-Intercompany Transactions


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Income Texas Applicable to Intercompany Transactions

  • No income tax effects associated with the elimination of the intercompany revenue or expenses since no profit or loss involved in these intercompany transactions.

  • It does not matter whether the parent company and its subsidiaries file separate income tax returns or a consolidated tax return.

Consolidated FS-Intercompany Transactions


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II. Accounting for Intercompany Transactions Involving Profit (Gain) or Loss

  • For intercompany transactions involving profit or loss, the unrealized profits or losses must be eliminated in the preparation of consolidated financial statements until they are realized.

Consolidated FS-Intercompany Transactions


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The Importance of Eliminating or Including Intercompany Profits (Gains) and Losses

  • Failure to eliminate unrealized profits and losses would result in consolidated income statements that report not only results of transactions with outsiders but also the results of related party activities within the affiliated group.

Consolidated FS-Intercompany Transactions


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The Importance of Eliminating or Including Intercompany Profits (Gains) and Losses (Contd.)

  • Similarly, no recognition of realized gains (losses) would misstate the consolidated net income.

  • The management can manipulate consolidated net income if unrealized intercompany profits and losses were not eliminated.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise

  • Types of Sales

    • Downstream intercompany sales

    • Upstream intercompany sales

    • Lateral intercompany sales

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)

  • a. Intercompany Sales at Cost

  • Example 8.3: Intercompany sale at cost

    • Assume that Palm sold merchandise costing $150,000 to Starr during the year ended 12/31/2001 at a selling price equals to Palm’s cost.

    • The ending inventories of Starr on 12/31/2001 included $25,000 of merchandise obtained form Palm.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.3 : (Contd.)

  • By 12/31/2001, Starr still owed Palm $15,000 for merchandise purchased during 12/31/2001.

  • Assuming perpetual inventory system for both companies, the following aggregate entries would be prepared by both companies for the foregoing transactions:

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.3 : (Contd.)

  • PalmCorporation Journal Entries

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.3 : (Contd.)

  • StarrCompany Journal Entries

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.3 : (Contd.)

  • The following is a partial working paper for consolidated financial statements of Palm and subsidiary (include only the data related to this intercompany sale of merchandise at cost):

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.3 : (Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper for Consolidated Financial Statements

  • For Year Ended December 31, 2001

*Palm Corporation’s $15,000 intercompany sales and intercompany cost of goods sold are offset in Palm’s separate income statement in the working paper.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.3 : (Contd.)

  • Note:

  • Starr Company’s cost of goods sold and inventories are not affected by working paper eliminations. Both Starr’s cost of goods sold and inventories are stated at cost.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)

  • b.Intercompany Sales with Unrealized Intercompany Profit in Ending Inventories

  • Without the working paper elimination, the consolidated ending inventory and cost of goods sold are both overstated.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)

  • The ending inventory is overstated for the mark up of the unsold ending inventory (the unrealized gain).

  • The cost of goods sold is overstated for the mark up of the cost of goods sold (the realized gain).

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4:Intercompany sales at a mark up

  • During 2001, Sage company (the 95%-owned subsidiary) sold merchandize to Post at a gross profit margin of 20% on sales price.

  • Sales by Sage to Post totaled $120,000 in year 2001, of which $40,000 remained unsold by Post on 12/31/2001.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4: (Contd.)

  • On 12/31/2001, Post still owed $30,000 to Sage for merchandise. Both companies use the perpetual inventory system.

  • The foregoing transactions are recorded in summary form by the two companies as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

  • Post Company Journal Entries

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

  • SageCorporation Journal Entries

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

  • The intercompany gross profit in Sage’s sale to Post in year 2001 is analyzed as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

  • The following working paper elimination is required for Sage’s intercompany’s sales of merchandise to Post for the year ended 12/31/2001:

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

  • Entering the preceding eliminations in the working paper for consolidated financial statements results in the consolidated amounts shown below (amounts for total sales to outsiders and cost of goods sold are assumed):

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

POST CORPORATION AND SUBSIDIARY

Partial Working Paper for Consolidated Financial Statements

For Year Ended December 31, 2001

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Merchandise (Contd.)Example 8.4 : (Contd.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Notes to the Intercompany Sales of Merchandise at a Mark Up by a Partially Own Subsidiary

  • 1.The $8,000 unrealized intercompany profit is attributable to Sage (the seller, a partially-owned subsidiary).

  • This unrealized intercompany profit should be taken into account in the computation of the minority interest in Sage’s net income for year 2001 (would be illustrated in Example 8.9).

Consolidated FS-Intercompany Transactions


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Notes to the Intercompany Sales of Merchandise at a Mark Up by a Partially Own Subsidiary (Contd.)

  • 2.Also, this $8,000 would be entered into the Sage’s portion of consolidated retained earnings on 12/31/2001.

  • 3.If the intercompany sales of merchandise are made by a parent company or by a wholly owned subsidiary, the unrealized intercompany profit will not have any effect on any minority interest in net income.

  • This is because the selling agent does not have minority stockholders.

Consolidated FS-Intercompany Transactions


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Intercompany (Unrealized) Profit in Beginning and Ending Inventories

  • It is assumed that, on a FIFO basis, the intercompany profit in the purchaser’s beginning inventories is realized through sales of the merchandise to outsiders during the following accounting period.

Consolidated FS-Intercompany Transactions


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Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • Only the intercompany profit in ending inventories remains unrealized at the end of the period.

  • Continuing with Example 8.4, assume that Sage’s intercompany sales of merchandise to Post Corporation during the year ended 12/31/2002, are analyzed as follows:

Consolidated FS-Intercompany Transactions


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Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • Analysis of Gross Profit

Consolidated FS-Intercompany Transactions


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Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • Sage’s intercompany sales ($120,000) and intercompany cost of goods sold ($96,000) for the year ended 12/31/2001 had been closed to Sage’s retained earnings at the end of 2001.

  • Thus, from a consolidated point of view Sage’s 12/31/2001 retained earnings was overstated by $7,600 (95% * $8,000).

Consolidated FS-Intercompany Transactions


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Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • The remaining $400 unrealized profit on 12/31/2001 is attributable to the minority interest in net assets of Sage.

  • The following working paper elimination would be prepared on 12/31/2002 to reflect the above facts:

Consolidated FS-Intercompany Transactions


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Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

* As indicated in Chapter 7 (Page 29), this elimination is posted to the beginning-of-year retained earnings in the statement of retained earnings section of the working paper for consolidated financial statements.

Consolidated FS-Intercompany Transactions


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Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest

  • A general principle is that all the unrealized intercompany profit in the ending inventory of the buyer (i.e., a partially owned or wholly owner subsidiary or a parent), should be eliminated for the consolidated financial statement as long as the seller is either the parent or other wholly owned subsidiaries.

Consolidated FS-Intercompany Transactions


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Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • On the other hand, when the seller is a partially owned subsidiary (either to its parent or to other subsidiaries), there is no general agreement regarding whether the unrealized intercompany profit in the ending inventory of the buyer (a parent or other subsidiaries) should be all eliminated.

Consolidated FS-Intercompany Transactions


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Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • The argument is :

  • The intercompany sale to the minority stockholder is considered as a sale to outsiders.

  • Therefore the unrealized intercompany profit in the ending inventory attributes to minority stockholder’s interest should be treated as realized.

  • It should not to be eliminated in the consolidated financial statements.

Consolidated FS-Intercompany Transactions


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Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • The following table illustrates the types of intercompany sales and the related issues of the unrealized intercompany profit in the ending inventory:

Consolidated FS-Intercompany Transactions


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Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

Consolidated FS-Intercompany Transactions


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Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • Note to the above table:

  • a.The unrealized intercompany profit is attributable to the seller (the partially-own sub.) and must be considered in the computation of the minority interest in net income of the partially own sub. of the year (see Example 8.4 and Example 8.9).

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Plant Assets

  • Intercompany sales of plant assets differ from intercompany sales of merchandise in two ways:

  • 1.Intercompany sales of plant assets between affiliated companies are rare transactions.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Plant Assets (Contd.)

  • 2. Due to the long economic lives of plant assets, it requires many accounting periods before the intercompany gains (losses) on sales of these assets are realized in transactions with outsiders.

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land

  • Example 8.5:

  • Assume that on 12/31/2001, Post (the parent company) sold to Sage (the partially owned subsidiary) a parcel of land costing $125,000 for $175,000. The two companies would record the following entries:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • In the consolidated financial statement, the land should be reported at the historical cost and the intercompany gain should be eliminated until it is realized (i.e., sold to an outsider by Sage).

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • The working paper elimination prepared on 12/31/2001 for the intercompany sale of land with gain transaction is as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • The above working paper elimination is entered in the working paper for consolidated financial statements for the year ended 12/31/2001 as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • POST CORPORATION AND SUBSIDIARY

  • Partial Working Paper for Consolidated Financial Statements

  • For Year Ended December 31, 2001

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • No journal entries affecting land would be made by Sage in the subsequent years due to land is not depreciable.

  • In the consolidated financial statements of subsequent years, the land should always be reported at the historical cost of $125,000 as long as it is not sold to an outsider.

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • Therefore, the following working paper elimination applies to all subsequent years as long as Sage does not sell the land to an outsider:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • Note: The foregoing working paper elimination has no effect on the minority interest in net income or net assets of the subsidiary, because the unrealized gain is attributable to the seller that is not a partially own subsidiary.

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • Assume that, Sage sold the land to an outsider for $200,000 in the year ended 12/31/2003, the following entry would be recorded by Sage:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Land (Contd.)Example 8.5: (Contd.)

  • A realized gain of $75,000 ($25,000 + $50,000) should be reported on the consolidated financial statement of 2002. Thus, the following working paper elimination is needed:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Depreciable Plant Asset

  • Assume that Sage (the partially owned subsidiary) sold machinery to Post (the parent) on 12/31/2001. Details of the sale and depreciation policy of the machinery are as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Depreciable Plant Asset (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Depreciable Plant Asset (Contd.)

  • The two companies would account for the sale on 12/31/2001 as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Depreciable Plant Asset (Contd.)

  • The following working paper elimination is required for the consolidated financial statements on 12/31/2001:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Depreciable Plant Asset (Contd.)

  • The elimination results the machine to be reported on the consolidated financial statements at its carrying amount to Sage as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Gain on Sale of Depreciable Plant Asset (Contd.)

  • Note: the elimination of the $23,800 gain should be taken into account in the minority interest in the net income of Sage (the seller) for year 2001. The $23,800 is also included in the Sage’s retained earnings, for consolidation purposes, on 12/31/2001 I (see textbook 376-378).

Consolidated FS-Intercompany Transactions


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Intercompany Gain subsequent to Date of Sale of Depreciable Plant Asset

  • The following working paper elimination is required for the consolidated financial statements of 12/31/2002:

Consolidated FS-Intercompany Transactions


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Intercompany Gain subsequent to Date of Sale of Depreciable Plant Asset (Contd.)

  • The elimination of the Post’s depreciation expense can also be verified as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Gain in Depreciation and Minority Interest

  • From the consolidation view point, the intercompany gain element of the acquiring affiliate’s annual depreciation expense represents a realization of a portion of the total intercompany gain by the selling affiliate .

Consolidated FS-Intercompany Transactions


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Intercompany Gain in Depreciation and Minority Interest (Contd.)

  • Thus the $4,760 credit to Post’s depreciation expense in the 12/31/2001 working paper elimination increases Sage’s net income for consolidated purposes.

  • This increase must be considered in the computation of the minority interest in the subsidiary’s net income for the year ended 12/31/2002.

Consolidated FS-Intercompany Transactions


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Intercompany Gain in later Years

  • The following working paper elimination is required for the consolidated financial statements on 12/31/2003:

Consolidated FS-Intercompany Transactions


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Intercompany Gain in later Years (Contd.)

  • Note to the working paper elimination: The sum of the debit amounts for retained earnings and minority interest in net assets of subsidiary is $4,760 less that that in 2002.

  • This is because $4,760 intercompany gain has been realized in 2002 through the depreciation process in 2002.

Consolidated FS-Intercompany Transactions


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Intercompany Gain in later Years (Contd.)

  • The sum of the debit amounts for retained earnings and minority interest in net assets represents the unrealized portion of the intercompany gain at the beginning of the year.

  • For each succeeding year, the unrealized position of the intercompany gain decreases (in the amount of $4,760), as indicated in the following summary of the working paper elimination debits for those years:

Consolidated FS-Intercompany Transactions


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Intercompany Gain in later Years (Contd.)

  • POST CORPORATION AND SUBSIDIARY

  • Partial Working Paper Eliminations-Debits Only

  • December 31,2004 though 2006

Consolidated FS-Intercompany Transactions


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Intercompany Gain in later Years (Contd.)

  • Similar working paper elimination will be prepared for year 2004,2005 and 2006. The changes are only in the debit accounts as indicated in the above table.

Consolidated FS-Intercompany Transactions


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Intercompany Gain in later Years (Contd.)

  • At the end of year 2006, the entire intercompany gain of $23,800 has been realized through Post’s annual depreciation expense. The following working paper elimination is required for the machine until it is sold:

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease

  • Land, building, machinery, equipment and other property may be transferred between affiliate entities in the form of a sales-type lease to the lessor and a capital lease to the lessee.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)

  • Example 8.6 :

    • Assume that Palm leased equipment to Starr (the wholly owned subsidiary) on 1/2/2001 under a sales-type lease requiring Starr to pay Palm $10,000 at beginning of each year starting 1/2/2001 through 2004, with a bargain purchase option of $1,000 payable on 1/2/2005.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Palm’s implicit interest rate, which was known to Starr and was less than Starr’s incremental borrowing rate, was 8%.

  • The economic life of the equipment to Starr was 6 years, with no residual value.

  • The cost of the leased equipment was $30,000.

  • There were no initial direct costs under the lease.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • The present value of the minimum lease payment is computed as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Journal entries of Palm Corporation for Year 2001:

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Journal entries of Starr Company for Year 2001:

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • The selected ledger accounts for both companies relative to the lease are as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. Inception of lease

  • b. Receipt of first payment

  • c. Receipt of second payment

  • d. Receipt of third payment

  • e. Receipt of fourth payment

  • f. Receipt of purchase option

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. Inception of lease ($41,000 - $36,506)

  • b. Interest for year [($31,000 - $4,494) x 0.08)]

  • c. Interest for year [($21,000 - $2,374) x 0.08)]

  • d. Interest for year [($11,000 - $884) x 0.08)]

  • e. Interest for year [($1,000 - $75) x 0.08)]; Adjusted $1 for rounding.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. Interest for Year 2001

  • b. Closing entry

  • c. Interest for Year 2002

  • d. Closing entry

  • e. Interest for Year 2003

  • f. Closing entry

  • g. Interest for Year 2004;Adjusted $ 1 for rounding.

  • h. Closing entry

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. Capital lease at Inception

  • b. Depreciation for Year 2001

  • c. Depreciation for Year 2002

  • d. Depreciation for Year 2003

  • e. Depreciation for Year 2004

  • f. Depreciation for Year 2001;Adjusted $1 for rounding.

  • g. Depreciation for Year 2001;Adjusted $1 for rounding.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. Capital lease at inception

  • b. First lease payment

  • c. ($10,000-$2,120 interest)

  • d. ($10,000-$1,490 interest)

  • e. ($10,000-$890 interest)

  • f. ($10,000-$75 interest)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. ($26,506 x 0.08)

  • b. Closing entry

  • c. ($18,626 x 0.08)

  • d. Closing entry

  • e. ($10,116 x 0.08)

  • f. Closing entry

  • g. ($925 x 0.08); Adjusted $ 1 for rounding.

  • h. Closing entry

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • a. ($36,506/6)

  • b. Closing entry

  • c. ($36,506/6)

  • d. Closing entry

  • e. ($36,506/6)

  • f. Closing entry

  • g. ($36,506/6)

  • h. Closing entry

  • i. ($36,506/6); Adjusted $1 for rounding.

  • j. Closing entry

  • k. ($36,506/6);Adjusted $1 for rounding.

  • l. Closing entry

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Partial working paper eliminations (in journal entry format) for the consolidated financial statements for year 2001 and year 2002 are as follows (note: intercompany interest revenue and intercompany interest expense are self-eliminated on the same line of the income statement section of the working paper for consolidated financial statements):

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper Eliminations

  • December 31, 2001

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper Eliminations

  • December 31, 2002

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • Note:

    • The elimination of 12/31/2001 removes the parent company’s intercompany sale and cost of goods sold.

    • The subsidiary’s depreciation expense of $1,084 for 2001 represents the realization of a portion of the parent’s gross profit margin on the intercompany sale.

Consolidated FS-Intercompany Transactions


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Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)Example 8.6: (Contd.)

  • In Year 2002 elimination, the original $6,506 unrealized gross profit element in the subsidiary’s leased equipment has been reduced by $1,084 (the reduction of the subsidiary’s year 2001 depreciation expense).

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Intangible Assets

  • The working paper eliminations for intercompany gains on sales of intangible assets are similar to those for intercompany gains in depreciable plant assets, except that no accumulated amortization is involved.

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Intangible Assets(Contd.)Example 8.7:

  • On 1/2/2002 Palm sold a patent to its wholly own subsidiary,Starr, for $40,000. The carrying amount of this patent for Palm is $32,000.

  • The patent had a remaining economic life of 4 years on 1/2/2002 and was amortized by the straight-line method.

  • The working paper elimination for year 2002 and year 2003 related to this intercompany transaction is as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Intangible Assets(Contd.)Example 8.7:(Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper Eliminations

  • December 31, 2002

Consolidated FS-Intercompany Transactions


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Intercompany Sales of Intangible Assets(Contd.)Example 8.7:(Contd.)

  • PALM CORPORATION AND SUBSIDIARY

  • Partial Working Paper Eliminations

  • December 31, 2003

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market

  • Intercompany gains and losses may be realized by the consolidated entity when one affiliate acquires outstanding bonds of another affiliate in the open market.

  • No realized or unrealized gain or loss would result from the direct acquisition of one affiliate’s bonds by another affiliate.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)

  • Example 8.8:

  • Assume that on 1/2/2001, Sage (the partially owned subsidiary) issued to the public $500,000 face account of 10% bonds due 1/1/2006.

  • The effective interest rate (market yield rate) is 12%. Interest was payable annually on 1/1.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • The net proceeds of the bond issue to Sage were $463,952, computed as follows (bond issue costs are disregarded):

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • The following entries were recorded by Sage for year 2001 regarding the issuance of the bond and the accrued interest:

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • 2001 Sage Company Journal Entries

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • Assume that on 12/31/2001, Post (the parent company) had cash available for investment.

  • The effective interest rate at the time is 15%. Thus, Sage’s bonds can be purchased in the open market at a substantial discount.

  • Post acquired 60% of Sage’s bonds on 12/31/2001 at $257,175 plus $30,000 accrued interest.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • The acquisition cost of 60% of Sage’s bonds is computed as follows:

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • Post prepared the following journal entry on 12/31/2001 to record the acquisition of Sage’s bonds:

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • The following entry is prepared by Sage (the bond issuer) on 12/31/2001 when notified by the parent company of this acquisition:

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • From the viewpoint of the consolidated entity, Post’s acquisition of Sage’s bonds is equivalent to the extinguishment of the bonds at a realized gain of $24,601, computed as follows:

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • The $24,601 realized gain is not recorded in the accounting records of either the parent company or the subsidiary.

  • However, it is recognized in the working paper elimination (in journal entry format) on 12/31/2001, shown as follows:

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Example 8.8: (Contd.)

  • POST CORPORATION AND SUBSIDIARY

  • Partial Working Paper Elimination

  • December 31,2001

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)

  • Notes to the partial working paper elimination:

  • 1.The intercompany interest receivable -- Post ($30,000) and intercompany interest payable-Sage ($30,000) are offset in the working paper elimination.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)

  • 2.The gain is attributes to Sage – the bond issuer (the subsidiary).

  • This treatment assumes that parent’s open market acquisition of the subsidiary’s bonds was, in substance, the extinguishment of the bonds by the subsidiary.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)

  • 3.The gain is included in the consolidated income statement of Post and subsidiary for the year ended 12/31/2001.

  • If the gain is material, it is displayed as an extraordinary item.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Minority interest in Gain on Extinguishemtn of Bonds

  • Since the gain is attributed to the partially owned subsidiary, the gain should be considered in the computation of the minority interest in the subsidiary’s net income for the year ended 12/31/2001.

Consolidated FS-Intercompany Transactions


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Acquisition of Affiliate’s Bonds in An Open Market (Contd.)Minority interest in Gain on Extinguishemtn of Bonds(Contd.)

  • This gain is also included in the subsidiary’s retained earnings to be included in the consolidated retained earnings on 12/31/2001.

  • See Example 8.9 for example. 

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years

  • In the following four years, the realized gain which is unrecorded by either affiliate on the date of acquisition,is reported by the consolidated entity through the differences in the two affiliates’ interest expense and the interest revenue.

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • The accounting for the bond interest by the two affiliates for the year ended 12/31/2002 and related ledger accounts for four remaining years for both companies are as follows:

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • 2002 Post Corporation Journal Entries

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • 2002 Sage Company Journal Entries

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • a.Acquisition of $300,000 face amount of bonds

  • b.Accumulation of discount ($38,576-$ 30,000)

  • c.Accumulation of discount ($39,863-$30,000)

  • d.Accumulation of discount ($41,342-$30,000)

  • e.Accumulation of discount ($43,044-$30,000)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • a.($257,175 x 0.15)

  • b.Closing entry

  • c.($265,751 x 0.15)

  • d.Closing entry

  • e.($275,614 x 0.15)

  • f. Closing entry

  • g.($286,956 x 0.15),Adjusted $ 1 for rounding.

  • h. Closing entry

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

a. Bonds acquired by parent company

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • a.Bonds acquired by parent company

  • b.Amortization ($33,813-$30,000)

  • c.Amortization ($34,271-$30,000)

  • d.Amortization ($34,783-$30,000)

  • e.Amortization ($35,357-$30,000)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • a.[($300,000-$18,224) x 0.12]

  • b.Closing entry

  • c.[($300,000-$14,411) x 0.12]

  • d.Closing entry

  • e.[($300,000-$10,140) x 0.12]

  • f. Closing entry

  • g.[($300,000-$5,357) x 0.12]

  • h. Closing entry

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • A summary of the differences between the intercompany interest revenue – Post and intercompany interest expense – Sage is as follows:

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • Notes to the above summary table:

  • 1.Although the acquisition gain is not recognized by either affiliate at acquisition, the gain is recognized by the consolidated entities in the following four years through the differences in the intercompany interest revenue – Post and the intercompany interest expense – Sage.

Consolidated FS-Intercompany Transactions


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Accounting for Gain (from Acquisition of Affiliate’s Bonds) in Subsequent Years (Contd.)

  • 2.The total of differences between parent’s intercompany interest revenue and subsidiary intercompany interest expense is equal to the realized gain on parent’s acquisition of subsidiary’s bonds.

Consolidated FS-Intercompany Transactions


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Working Paper Elimination on 12/31/2002 (One Year Subsequently to Acquisition of Bonds)

  • The working paper elimination for the bonds and interest on 12/31/2002 is as follows:

Consolidated FS-Intercompany Transactions


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Working Paper Elimination on 12/31/2002 (One Year Subsequently to Acquisition of Bonds) (Contd.)

  • Note to the above working paper elimination: 

  • The foregoing working paper elimination reduces the consolidated income (before minority interest) by $4,796 (the difference between the intercompany interest revenue and intercompany interest expense for year 2002).

Consolidated FS-Intercompany Transactions


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Working Paper Elimination on 12/31/2002 (One Year Subsequently to Acquisition of Bonds) (Contd.)

  • Note (contd.):

  • This is because the entire gain of $24,601 had been recognized in the consolidated income statement of year 2001.

  • This is evident by the credit of retained earnings and the minority interest in net assets of subsidiary of $23,371 and $1,230, respectively.

  • If the gain of $4,796 is not eliminated, the consolidated income of year 2002 will be overstated by $4,796.

Consolidated FS-Intercompany Transactions


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Working paper elimination on 12/31/2002

  • Similar working paper elimination for years 2004 and 2005 would be prepared. Assume that Sage paid the bonds in full on maturity 1/2/2006. Therefore, no further working paper eliminations for the bonds would be required.

Consolidated FS-Intercompany Transactions


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Working paper elimination on 12/31/2002 (Contd.)

  • The working paper elimination on 12/31/2003 is as follows:

Consolidated FS-Intercompany Transactions


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Effect of Intercompany Profits on Minority Interest in Net Income

  • The following working paper eliminations for Post and its 95%-owned subsidiary (Sage) are taken from p138and p139 of chapter 7, and from pages 42,65,76, and 131of this chapter.

  • These eliminations are followed by a revised elimination (which differs from the one on p150 of chapter 7) for minority interest in net income of subsidiary.

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

  • POST CORPORATION AND SUBSIDIARY

  • Working Paper Eliminations

  • December 31, 2001

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

  • The above working paper elimination (a) is to carry out the following:

  • (1) Eliminate intercompany investment and equity accounts of subsidiary at the beginning of year,and subsidiary dividends.

  • (2) Provide for Year 2001 depreciation and amortization on differences between current fair values and carrying amounts of Sage's identifiable net assets as follows:

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

  • (3) Allocate unamortized differences between combination date current fair values and carrying amounts to appropriate assets.

  • (4) Establish minority interest in net assets of subsidiary at beginning of year ($61,000), less minority interest in dividends declared by subsidiary during year ($50,000 x 0.05=$2,500).

  • (Income tax effects are disregarded.)

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

Consolidated FS-Intercompany Transactions


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Intercompany Profits on Minority Interest in Net Income (contd.)

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements (for Year 2001)

  • The following is a partial working paper for Post Corporation and subsidiary for the year ended 12/31/2001.

  • The amounts for Post and Sage are the same as those on p145,146 of Chapter 7.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements (contd.)

  • Partial Working Paper for Consolidated Financial Statements

  • For Year Ended December 31, 2001

Consolidated FS-Intercompany Transactions


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  • Net decrease in revenue ( and gains): $81,700 + $120,000 + $50,000 + $23,800 - $24,601$250,899

  • Less: Net decrease in costs and expenses: $96,000 + $16,000 -$19,000 - $3,940 89,060

  • Decrease in combined net incomes to compute consolidated net income$161,839

  • # A decrease in dividends and an increase in retained earnings

Working Paper for Consolidated Financial Statements (contd.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements(contd.)

  • The foregoing working paper indicates that when intercompany profits exist, consolidated net income is not the same as the parent company's net income

  • The consolidated retained earnings are not the same as the total of the parent company's two retained earnings amounts.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002)

  • Continued with the example of Post and its subsidiary (Sage), the followings are selected Post's t-accounts(investment in Sage, retained earnings) and Sage's t-account of retained earnings.

  • Review of these accounts will help in understanding the working paper for consolidated financial statements of Year 2002.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002)(cont.)

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • a.Total cost of business combination

  • b.Dividend declared by Sage

  • c.Net income of Sage

  • d.Amortization of differences

  • e.Amortization of goodwill

  • f. Dividend declared by Sage

  • g.Net income of Sage

  • h.Amortization of differences

  • i.Amortization of goodwill

  • j. Dividend declared by Sage

  • k.Net income of Sage

  • l.Amortization of differences

  • m. Amortization of goodwill

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • a.Balance

  • b.Close net income available for dividends

  • c.Close Dividends Declared account

  • d. Close net income available for dividends

  • e.Close Dividends Declared account

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

a.Close net income not available for dividends

b.Close net income not available for dividends

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • a.Balance

  • b.Close net income

  • c.Close Dividends Declared account

  • d. Close net income

  • e.Close Dividends Declared account

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • The following is the working paper for consolidated financial statements for year 2002 of Post and its 95%-partially owned subsidiary:

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • POST CORPORATION AND SUBSIDIARY

  • Working paper for Consolidated Financial Statements

  • For Year Ended December 31, 2002

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.

* A decrease in dividends and an increase in retained earnings.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Working Paper for Consolidated Financial Statements( for Year 2002) (cont.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002)

  • POST CORPORATION AND SUBSIDIARY

  • Working Paper Eliminations

  • December 31, 2002

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

  • Contd.

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

  • The above elimination is to carry out the following:

  • (1) Eliminate intercompany investment and equity accounts of subsidiary at beginning of year,and subsidiary dividends.

  • (2) Provide for Year 2002 depreciation and amortization on differences between current fair values and carrying amounts of Sage's identifiable net assets as follows:

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

  • (3) Allocate unamortized differences between combination date current fair values and carrying amounts to appropriate assets.

  • (4) Establish minority interest in net assets of subsidiary at beginning of year,excluding intercompany profits effects ($62,800), less minority interest in dividendsdeclared by subsidiary during year ($60,000 x 0.05 = $3,000).

  • (Income tax effects are disregarded.)

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

Consolidated FS-Intercompany Transactions


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Working Paper Elimination (for year 2002) (contd.)

Consolidated FS-Intercompany Transactions