Presentation is loading. Please wait.

Presentation is loading. Please wait.

Intercompany Profit Transactions – Plant Assets

Published byRodney McLaughlin Modified over 6 years ago

Similar presentations

Presentation on theme: "Intercompany Profit Transactions – Plant Assets"— Presentation transcript:

1 Intercompany Profit Transactions – Plant Assets
Chapter 6: Intercompany Profit Transactions – Plant Assets Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall 1

2 Intercompany Profits – Plant Assets: Objectives
Assess the impact of intercompany profit on transfers of plant assets in preparing consolidations workpapers. Defer unrealized profits on plant asset transfers by either the parent or subsidiary. Recognize realized, previously-deferred profits on plant asset transfers. Adjust the calculations of noncontrolling interest share in the presence of intercompany profits on plant asset transfers. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

3 1: Transfers of Plant Assets
Intercompany Profit Transactions – Plant Assets 1: Transfers of Plant Assets Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

4 Intercompany Fixed Asset Sales
Intercompany sales of nondepreciable fixed assets: In year of intercompany sale Defer any gain or loss Restate fixed asset to cost In years of continued ownership Adjust investment account to defer gain or loss (adjust noncontrolling interest too, if upstream sale) In year of sale to outside entity Adjust investment account (and noncontrolling interest if upstream sale) Recognize the previously deferred gain or loss Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

5 Intercompany Sale of Land
Pak owns 90% of San, acquired at cost equal to fair value. In 2011, Pak sells (downstream) land to San and records a $10 gain. In 2015, San sells the land to an outside entity at a $15 gain. San's separate income was $70 in 2011, $80 per year for 2012 to 2014, and $90 in 2015. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

6 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2011 Calculations Defer the unrealized gain, with full effect to Pak Pak's Income from San 90%(70) – 10 = $53 Noncontrolling interest share 10%(70) = $7 Elimination entry for 2011 Worksheet Gain on sale of land (-Ga, -SE) 10 Land (-A) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

7 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2012 to 2014 Calculations Continue to defer gain, with full effect to Pak Pak's Income from San 90%(80) = $72 Noncontrolling interest share 10%(80) = $8 Elimination entry for Worksheets in 2012 to 2014 Investment in San (+A) 10 Land (-A) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

8 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2015 Calculations Recognize the previously deferred gain, with full effect to Pak Pak's Income from San 90%(90) + 10 = $91 Noncontrolling interest share 10%(90) = $9 Elimination entry for 2015 Worksheet Investment in San (+A) 10 Gain on sale of land (Ga, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

9 2: Deferring Unrealized Profits
Intercompany Profit Transactions – Plant Assets 2: Deferring Unrealized Profits Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

10 Unrealized Profits on Fixed Assets
Unrealized profit or loss on nondepreciable fixed assets Defer in year of intercompany sale Continue deferring by adjusting the investment in subsidiary (and noncontrolling interest if upstream) Recognize full profit or loss upon resale to outside entity Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

11 Depreciable Fixed Assets
Gains and losses on intercompany sales of depreciable fixed assets Defer in period of intercompany sale Recognize gain or loss over remaining life of asset Adjust asset and depreciation down for gains Adjust asset and depreciation up for losses Recognize any unamortized gain or loss upon sale to outside entity Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

12 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Downstream Example Per owns 80% of Sop, acquired at cost equal to fair value. On 1/1/2011, Per sells machinery to Sop at a $30 profit. The machinery has a remaining life of 5 years from 1/1/2011. Sop disposes of the machinery at book value at the end of 5 years. Sop's income is $70 in 2011, $80 per year for 2012 to 2014, and $90 in 2015. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

13 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2011 Calculations Defer the unrealized gain and amortize it over 5 years with full effect to Per 30 gain / 5 years = $6 Per's Income from Sop 80%(70) – = $32 Noncontrolling interest share 20%(70) = $14 Elimination entry for 2011 Worksheet Gain on sale of machinery (-Ga, -SE) 30 Machinery (-A) Accumulated depreciation (+A) 6 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

14 3: Recognizing Realized, Previously Deferred Profits
Intercompany Profit Transactions – Plant Assets 3: Recognizing Realized, Previously Deferred Profits Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

15 Previously Deferred Gains/Losses
Recognize over the life of the depreciable asset Downstream sales Adjust investment in subsidiary account Upstream sales Adjust investment in subsidiary account and noncontrolling interest, proportionately Intercompany sales at a gain Adjust asset and depreciation down Intercompany sales at a loss Adjust asset and depreciation up Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

16 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2012 to 2014 Calculations Continue to recognize part of the gain, with full effect to Per Per's Income from Sop 80%(80) + 6 = $70 Noncontrolling interest share 20%(80) = $16 Elimination entry for Worksheets in 2012 Investment in Sop (+A) 24 Accumulated depreciation (+A) 6 Machinery (-A) 30 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

17 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Entries (cont.) Worksheet entries for 2013 Worksheet entries for 2014 Investment in Sop (+A) 18 Accumulated depreciation (+A) 12 Machinery (-A) 30 6 Depreciation expense (-E, +SE) Investment in Sop (+A) 12 Accumulated depreciation (+A) 18 Machinery (-A) 30 6 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

18 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2015 Calculations Recognize the remaining deferred gain, with full effect to Per Per's Income from Sop 80%(90) + 6 = $78 Noncontrolling interest share 20%(90) = $18 Elimination entries for 2015 Worksheet Investment in Sop (+A) 6 Accumulated depreciation (+A) 24 Machinery (-A) 30 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

19 4: Impact on Noncontrolling Interest
Intercompany Profit Transactions – Plant Assets 4: Impact on Noncontrolling Interest Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

20 Sharing Unrealized Gain or Loss
Upstream sales of fixed assets require: Deferring the gain or loss on the sale Recognizing a portion of the gain or loss as the asset depreciates Writing off any unrecognized gain or loss upon the sale of the asset Sharing the gains and losses between the controlling and noncontrolling interests Upstream sales impact noncontrolling interests! Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

21 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
Upstream Example Pail owns 70% of Shovel, acquired at cost equal to fair value. On 1/1/2011, Shovel sells machinery to Pail at a $40 profit. The machinery has a remaining life of 5 years from 1/1/2011. Pail uses the machinery for four years, then sells it at a profit at the start of Shovel's income is $70 in 2011, $80 per year for 2012 to 2014, and $90 in 2015. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

22 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2011 Calculations Defer the unrealized gain and amortize it over 5 years sharing the gain 40 gain / 5 years = $8 Pail's Income from Shovel 70%(70 – ) = $26.6 Noncontrolling interest share 30%(70 – ) = $11.4 Elimination entry for 2011 Worksheet Gain on sale of machinery (-Ga, -SE) 40 Machinery (-A) Accumulated depreciation (+A) 8 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

23 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2012 to 2014 Calculations Continue to recognize part of the gain, sharing its effect between the controlling and noncontrolling interests Pail's Income from Shovel 70%(80 + 8) = $61.6 Noncontrolling interest share 30%(80 + 8) = $26.4 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

24 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2012 Worksheet Entries Elimination entry for Worksheets in 2012 Investment in Shovel (+A) 22.4 Noncontrolling interest (-SE) 9.6 Accumulated depreciation (+A) 8.0 Machinery (-A) 40.0 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

25 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2013 Worksheet Entries Worksheet entries for 2013 Investment in Shovel (+A) 16.8 Noncontrolling interests (-SE) 7.2 Accumulated depreciation (+A) 16.0 Machinery (-A) 40 8.0 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

26 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2014 Worksheet Entries Worksheet entries for 2014 Investment in Shovel (+A) 11.2 Noncontrolling interest (-SE) 4.8 Accumulated depreciation (+A) 24.0 Machinery (-A) 40.0 8.0 Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

27 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
2015 Calculations Recognize the remaining deferred gain, sharing the impact with controlling and noncontrolling interests Unamortized gain = 1 year at $8 Pail's Income from Shovel 70%(90 + 8) = $68.6 Noncontrolling interest share 30%(90 + 8) = $29.4 Elimination entries for 2015 Worksheet Investment in Shovel (+A) 5.6 Noncontrolling interests (-SE) 2.4 Accumulated depreciation (+A) 32.0 Machinery (-A) 40.0 8.0 Gain on sale of machinery (Ga, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

28 Sale at Other Than Fair Value
Intercompany sales of fixed assets at prices other than fair value Deserve scrutiny by shareholders Sales above fair value move additional cash to the seller Sales below fair value transfer valuable goods to the buyer There is a transfer of wealth between the affiliated companies, and between the controlling and noncontrolling interests Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

29 Inventory Items  Fixed Assets
An intercompany sale of inventory which is acquired as a fixed asset Unrealized profit is removed from cost of sales in year of sale Profit is recognized over the fixed asset's life Cost of sales (E, -SE) XXX Machinery (-A) Accumulated depreciation (+A) X Depreciation expense (-E, +SE) Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

30 Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

Download ppt "Intercompany Profit Transactions – Plant Assets"

Similar presentations

Consolidated Financial Statements: Intercompany Transactions

Consolidated Financial Statements: Intercompany Transactions
Chapter 6: Intercompany Profit Transactions – Plant Assets

Chapter 6: Intercompany Profit Transactions – Plant Assets
Electronic Presentations in Microsoft® PowerPoint®

Electronic Presentations in Microsoft® PowerPoint®
Irwin/McGraw-Hill © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 7-1 Intercompany Inventory Transactions 7 Electronic Presentation by Douglas.

Irwin/McGraw-Hill © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. 7-1 Intercompany Inventory Transactions 7 Electronic Presentation by Douglas.
Chapter 5: Intercompany Profit Transactions – Inventories

Chapter 5: Intercompany Profit Transactions – Inventories
CHAPTER 4 4 Transactions: Merchandise, Plant Assets, and Notes Fundamentals of Advanced Accounting 1st Edition Fischer, Taylor, and Cheng.

CHAPTER 4 4 Transactions: Merchandise, Plant Assets, and Notes Fundamentals of Advanced Accounting 1st Edition Fischer, Taylor, and Cheng.
Electronic Presentations in Microsoft ® PowerPoint ® Prepared by James Myers, C.A. University of Toronto © 2010 McGraw-Hill Ryerson Limited Chapter 6,

Electronic Presentations in Microsoft ® PowerPoint ® Prepared by James Myers, C.A. University of Toronto © 2010 McGraw-Hill Ryerson Limited Chapter 6,
Chapter 7: Intercompany Profit Transactions – Bonds

Chapter 7: Intercompany Profit Transactions – Bonds
Concepts of Consolid. Statements - 1 Parent Subsidiary Consolidated financial statements are prepared. Concepts of Consolidated Financial Statements 2-1.

Concepts of Consolid. Statements - 1 Parent Subsidiary Consolidated financial statements are prepared. Concepts of Consolidated Financial Statements 2-1.
© 2009 Pearson Education, Inc. publishing as Prentice Hall10-1 Chapter 10: Subsidiary Preferred Stock, Consolidated Earnings Per Share, and Consolidated.

© 2009 Pearson Education, Inc. publishing as Prentice Hall10-1 Chapter 10: Subsidiary Preferred Stock, Consolidated Earnings Per Share, and Consolidated.
© The McGraw-Hill Companies, Inc., 2004 Slide 1-1 McGraw-Hill/Irwin Chapter One The Equity Method of Accounting for Investments.

© The McGraw-Hill Companies, Inc., 2004 Slide 1-1 McGraw-Hill/Irwin Chapter One The Equity Method of Accounting for Investments.
McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc. All rights reserved. 7 Intercompany Inventory Transactions.

McGraw-Hill/Irwin© 2008 The McGraw-Hill Companies, Inc. All rights reserved. 7 Intercompany Inventory Transactions.
© The McGraw-Hill Companies, Inc., 2004 Slide 5-1 McGraw-Hill/Irwin Chapter Five Consolidated Financial Statements – Intercompany Asset Transactions.

© The McGraw-Hill Companies, Inc., 2004 Slide 5-1 McGraw-Hill/Irwin Chapter Five Consolidated Financial Statements – Intercompany Asset Transactions.
© The McGraw-Hill Companies, Inc., 2001 Slide 7-1 McGraw-Hill/Irwin 7 C H A P T E R Ownership Patterns and Income Taxes Updated Sixth Edition.

© The McGraw-Hill Companies, Inc., 2001 Slide 7-1 McGraw-Hill/Irwin 7 C H A P T E R Ownership Patterns and Income Taxes Updated Sixth Edition.
Consolidation Techniques and Procedures

Consolidation Techniques and Procedures
© The McGraw-Hill Companies, Inc., 2004 Slide 1-1 McGraw-Hill/Irwin Chapter One The Equity Method of Accounting for Investments.

© The McGraw-Hill Companies, Inc., 2004 Slide 1-1 McGraw-Hill/Irwin Chapter One The Equity Method of Accounting for Investments.
5 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Intercompany Profit Transactions – Inventories.

5 - 1 ©2003 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn Intercompany Profit Transactions – Inventories.
©Cambridge Business Publishing, 2010 Single Economic Entity  Consolidated statements present financial performance and status of consolidated companies.

©Cambridge Business Publishing, 2010 Single Economic Entity  Consolidated statements present financial performance and status of consolidated companies.
Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Intercompany Transfers of Services and Noncurrent Assets 6.

Copyright © 2009 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Intercompany Transfers of Services and Noncurrent Assets 6.
2 Introduction When a holding company (parent) purchases the share capital of its subsidiary (or subsidiaries), each company in the group: remains a legal.

2 Introduction When a holding company (parent) purchases the share capital of its subsidiary (or subsidiaries), each company in the group: remains a legal.

Similar presentations

Ads by Google