Advanced accounting 10th by a beams athony ch06

Assess the impact of intercompany profit on transfers of plant assets in preparing consolidations working papers.. Adjust the calculation of noncontrolling interest amounts in the pres

Chapter 6: Intercompany Profit

Transactions – Plant Assets

by Jeanne M David, Ph.D., Univ of Detroit Mercy

to accompany

Advanced Accounting , 10th edition

by Floyd A Beams, Robin P Clement, Joseph H Anthony, and Suzanne Lowensohn

Intercompany Profits – Plant

Assets: Objectives

1 Assess the impact of intercompany profit on transfers of plant assets

in preparing consolidations working papers.

2 Defer unrealized profits on asset transfers by either the parent or

subsidiary.

3 Recognize realized, previously deferred profits on asset transfers by

the parent or subsidiary.

4 Adjust the calculation of noncontrolling interest amounts in the

presence of intercompany profits on asset transfers

1: Transfers of Plant Assets

Intercompany Profit Transactions – Plant Assets

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)

– Restate fixed asset to cost

• In year of sale to outside entity

– Adjust investment account (and

noncontrolling interest if upstream sale)

– Recognize the previously deferred gain or loss

Intercompany Sale of Land

• Park owns 90% of Stan, acquired at cost equal to fair value In 2009, Park sells (downstream) land to Stan and records a $10 gain In 2013, Stan sells the land to an outside entity at a $15 gain Stan's separate income was $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013

2009 Calculations

Defer the unrealized gain, with full effect to Park

• Park's Income from Stan

90%(70) – 10 = $53

• Noncontrolling interest share

10%(70) = $7Elimination entry for 2009 Worksheet

2010 to 2012 Calculations

Continue to defer gain, with full effect to Park

• Park's Income from Stan

90%(80) = $72

• Noncontrolling interest share

10%(80) = $8Elimination entry for Worksheets in 2010 to 2012

2013 Calculations

Recognize the previously deferred gain, with full effect to Park

• Park's Income from Stan

90%(90) + 10 = $91

• Noncontrolling interest share

10%(90) = $9Elimination entry for 2013 Worksheet

2: Deferring Unrealized Profits

Intercompany Profit Transactions – Plant Assets

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

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

Downstream Example

Perry owns 80% of Soper, acquired at cost equal to fair value On 1/1/09, Perry sells equipment to Soper at a $30 profit The equipment has a remaining life of 5 years from 1/1/09 Soper disposes of the equipment

at book value at the end of 5 years Soper's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013

3: Recognizing Realized, Previously Deferred Profits

Intercompany Profit Transactions – Plant Assets

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

2010 to 2012 Calculations

Continue to recognize part of the gain, with full effect to Perry

• Perry's Income from Soper

80%(80) + 6 = $70

• Noncontrolling interest share

20%(80) = $16Elimination entry for Worksheets in 2010

Entries (cont.)

Worksheet entries for 2011

Worksheet entries for 2012

2013 Calculations

Recognize the remaining deferred gain, with full effect to Perry

• Perry's Income from Soper

80%(90) + 6 = $78

• Noncontrolling interest share

20%(90) = $18Elimination entries for 2013 Worksheet

Accumulated depreciation 24

4: Impact on Noncontrolling Interest

Intercompany Profit Transactions – Plant Assets

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!

Gain on sale of equipment 40

2010 to 2012 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

2013 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 2013 Worksheet

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

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

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