Slide CHAPTER 10 INTERCOMPANY FIXED ASSET TRANSFERS

Slide FOCUS OF CHAPTER 10 l Changing From The New Basis of Accounting to The Old Basis of Accounting in Consolidation l The Additional Complexities of Fixed Asset Transfers in Relation to Inventory Transfers

Slide Summary of GAAP Requirements for Preparing Consolidated Statements l ALL intercompany transactions must be eliminated in consolidation. l ALL unrealized intercompany profit or gain must be eliminated. lThe gross profit (full gain) is eliminated. l Income taxes (benefit) on such profits or gains (or losses) must also be deferred. l Sharing the deferral with NCI shareholders is allowed.

Slide The Consolidated Perspective lFrom a consolidated viewpoint, the reported amount for a fixed asset cannot change merely because the asset has been moved to a different location within the consolidated group. Paxco Saxco Consolidated Group Saxco

Slide The Consolidated Perspective l What applies to intercompany fixed asset transfers applies equally as well to transfers of: n Inventory n Patents n Copyrights n Capitalized software n Other assets

Slide Changing from the New Basis to the Old Basis in Consolidation l The Objective of Changing to the Old Basis of Accounting in Consolidation: n To report amounts based on the SELLING ENTITY’S historical cost for the: s Fixed asset’s cost. s Related accumulated depreciation. s Related depreciation expense. n To defer recognizing unrealized profit/gain. #1 #2 #3

Slide Developing Fixed Asset Consolidation Entries: The Classic Approach l Compare WWD with WWWHBD: n WHAT WAS DONE n WHAT WE WISH HAD BEEN DONE l Use the differences for the consolidation entry. This approach is the same as that used for preparing CORRECTING entries.

Slide Developing Fixed Asset Consolidation Entries: The Classic Approach l STEP #1: Obtain the balances that exist on the BUYING entity’s books at the balance sheet date. (WWD) l STEP #2: Perform a pro forma calculation of the balances that would have existed if the transfer had been made at the SELLING entity’s carrying value. (WWWHBD) l STEP #3: Use the differences between steps 1 and 2 for the consolidation entry.

Slide Using the Right Depreciable Life: What’s Relevant and What’s NOT l In performing the pro forma calculation in STEP #2, use the relevant life: n What’s NOT Relevant: s The OLD remaining life at the transfer date. n What’s Relevant: s The NEW assigned remaining life (if different from the old remaining life).

Slide Review Question #1 l On 4/1/04, Potax reported a $24,000 gain on equipment sold to Sotax (100% owned), which extended the then remaining life of 2 yrs. to 3 yrs. The adjustment to depreciation expense in consolidation at 12/31/04 is: A. $6,000 B. $8,000 C. $9,000 D. $12,000 E. None of the above.

Slide Review Question #1--With Answer l On 4/1/04, Potax reported a $24,000 gain on equipment sold to Sotax (100% owned), which extended the then remaining life of 2 yrs. to 3 yrs. The adjustment to depreciation expense in consolidation at 12/31/04 is: A. $6,000 ($24,000/3 x 3/4 yr.) B. $8,000 C. $9,000 D. $12,000 E. None of the above.

Slide Review Question #2 l On 7/1/04, Pilax had a $24,000 gain on equip- ment sold to Silax (100% owned) for $144,000. Silax extended the then remaining life of 3 yr. ( original life was 10 yrs.) to 4 yrs. What is the consolidated accumulated depr. at 12/31/04 ? A. $295,000 B. $296,000 C. $300,000 D. $310,000 E. $316,000

Slide Review Question #2--With Answer l On 7/1/04, Pilax had a $24,000 gain on equip- ment sold to Silax (100% owned) for $144,000. Silax extended the then remaining life of 3 yr. ( original life was 10 yrs.) to 4 yrs. What is the consolidated accumulated depr. at 12/31/04 ? A. $295,000 ($280,000 + [$120,000/4 x 1/2 yr.]) B. $296,000 C. $300,000 D. $310,000 E. $316,000

Slide End of Chapter 10 l Time to Clear Things Up-- Any Questions?