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Chapter Five. Consolidated Financial Statements – Intra-Entity Asset Transactions. McGraw-Hill/Irwin. Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Intra-entity Transactions. 5- 2.

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chapter five
Chapter Five

Consolidated Financial Statements – Intra-Entity Asset Transactions


Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

intra entity transactions
Intra-entity Transactions


  • Transactions between the parent and subsidiary are considered “internal” transactions of a single economic entity.
  • The effects of these intra-entity transactions should be eliminated from the consolidated financial statements.
  • Thus, consolidated statements only reflect transactions with outside parties.
intra entity transactions inventory transfers
Intra-entity Transactions – Inventory Transfers



Eliminate all intra-entity sales/purchases of inventory, by eliminating the sales price of the transfer – which one company recorded as sales, and the other recorded as cost of goods sold.

Note: Assuming inventory has been re-sold to a third-party, both companies have debited COGS and credited Sales for the same inventory.

intra entity transactions inventory transfers1
Intra-entity Transactions – Inventory Transfers



Despite Entry TI, ending inventory is still overstated by the amount of gain on any inventory that remains unsold at year end.

We must eliminate the unrealized gain as follows:

Note: Any inventory that was ‘marked-up’ in an I/C transfer must be returned to it’s original cost if it has not been sold to an outside party.

intra entity transactions inventory transfers2
Intra-entity Transactions – Inventory Transfers



In the year that the inventory is subsequently sold to a third party, the I/C gain is in beginning Retained Earnings on the seller’s books, and must be moved to Consolidated Income.

Note: The separate records of each company still contain the I/C transactions, including any gain that was recorded at the time it occurred.

unrealized inventory gain other issues
Unrealized Inventory Gain - Other issues


  • If it’s DOWNSTREAM, then any unrealized gain belongs to the parent.
  • If it’s UPSTREAM, then any unrealized gain belongs to the subsidiary.
    • We will reduce the Sub’s net income by the unrealized gain prior to calculating the noncontrolling interest’s share.

Does it matter if the sale is Upstream or Downstream?


intra entity transactions inventory transfers3
Intra-entity Transactions – Inventory Transfers



If the transfer of inventory is downstream AND 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.

Note: This properly eliminates the gain from the Equity in Sub Income account and moves it to the Parent’s operating income accounts.

intra entity transactions land transfer
Intra-entity Transactions – Land Transfer



If land is transferred between the parent and sub at a gain, the gain is considered unrealized and must be eliminated.

Note: By crediting land for the same amount, this effectively returns the land to its carrying value on the date of transfer.

intra entity transactions land transfer1
Intra-entity Transactions --Land Transfer



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.

Note: The original gain was closed to R/E at the end of that period. When we eliminate the gain in subsequent years, it must come from R/E.

intra entity land transfers eliminating unrealized gains
Intra-entity Land TransfersEliminating Unrealized Gains


ENTRY *GL (Year of sale)

In the period the land is sold to a third party, the unrealized gain must be eliminated one more time, and also finally recognized as a REALIZED gain in the current period’s consolidated financial statements.

Note: Modify the entry to credit the Gain account instead of Land.

the effect of land transfers on noncontrolling interests
The Effect of Land Transfers on Noncontrolling Interests


DOWNSTREAM transfers have no effect on noncontrolling interest.

UPSTREAM transfers have a gain on the SUBSIDIARY books!

All noncontrolling interest balances are based on the sub’s net income EXCLUDING the intra-entity gain

intra entity transactions depreciable asset transfers
Intra-entity Transactions -- Depreciable Asset Transfers


In Years Following the Year of Transfer

Equipment is carried on the individual books at a different amount than on the consolidated books.

The amounts change each year as depreciation is computed.

To get the worksheet adjustments, compare the individual records to the consolidated records.

intra entity transactions depreciable asset transfers1
Intra-entity Transactions -- Depreciable Asset Transfers


On Baker’s (buyer’s) books, the annual depreciation = $90,000 ÷ 10 yrs. = $9,000 per year.

The 1/1/11 R/E effect = the original gain of $30,000 on Able’s (seller’s) books less one year of depreciation.

intra entity transactions depreciable asset transfers2
Intra-entity Transactions -- Depreciable Asset Transfers


For the consolidated entity, the annual depreciation = $48,000 remaining BV ÷ 8 yrs. = $6,000 per year.

The Accumulated Depreciation at 12/31/11 = $40,000 accumulated depreciation at 12/31/09 + two years of depreciation.

intra entity transactions depreciable asset transfers3
Intra-entity Transactions -- Depreciable Asset Transfers


The consolidation worksheet adjustments appear in the last column.