Chapter Five. Consolidated Financial Statements – Intercompany Asset Transactions. Intercompany Inventory Transactions. Transactions between the parent and subsidiary are viewed as “internal” transactions of a single economic entity.
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Consolidated Financial Statements – Intercompany Asset Transactions
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.
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.
If the inventory was sold during the year, the gain is now in Retained Earnings and must be moved back to Income.
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.
On April 5, 2008 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, 2008, World Co. still had 250 of the units on hand.
Record the consolidation entries on 12/31/08 to eliminate the unrealized gain.
First, the entire intercompany transfer must be eliminated.
Noncontrolling Interest in Sub Net Income = the noncontrolling % of the sub’s net income, AFTER eliminating UPSTREAM unrealized intercompany profit.
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.
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 period’s income statement. Now, the gain resides in R/E. Therefore, when we eliminate the gain, it must come from R/E.
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 period’s consolidated financial statements.
On June 25, 2007 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, 2009 Sub Inc. still owns the land.
Record the appropriate consolidation entry on 12/31/09.
This entry must be made at the end of each year as long as the land is still on the books.
If the transfer is UPSTREAM, the gain is attributed to the SUBSIDIARY!
All noncontrolling interest balances are to be based on the subsidiary’s net income EXCLUDING the intercompany gain
What if the land transfer is UPSTREAM?
If the transfer is DOWNSTREAM, there is no effect on noncontrolling interest.
In the year of transfer, the unrealized gain must be eliminated and the assets restated to original historical cost.
In addition, the buyer’s depreciation is based on the inflated transfer price. The excess depreciation expense must be eliminated.
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.
Big Wheel Trucking (BWT) owns 80% of Quick Delivery, Inc. On 1/1/07, 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 12/31/08.
On BWT’s books, the annual depreciation = $80,000 ÷ 4 yrs. = $20,000 per year.
The 1/1/08 R/E effect = the original gain of $40,000 on Quick Delivery’s books less 1 year of depreciation.
For the consolidated entity, the annual depreciation = $40,000 remaining BV ÷ 4 yrs. = $10,000 per year.
The Acc. Depr. At 12/31/08 = $60,000 accumulated depreciation at 1/1/07 + 2 years of depreciation.
The consolidation worksheet adjustments appear in the last column.
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:
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:
WHAT DO YOU THINK?
Hey, Chester, ol’ buddy!
I’m thinkin’ we need to switch desks in a little “intercompany” transfer.