beams11_ppt06-intercompany plant asset

to accompanyAdvanced Accounting, 11th edition

by Beams, Anthony, Bettinghaus, and Smith

Chapter 6:

Intercompany Profit Transactions – Plant Assets

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

6-1

Intercompany Profits – Plant Assets: Objectives

1. Assess the impact of intercompany profit on transfers of plant assets in preparing consolidations workpapers.

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

3. Recognize realized, previously-deferred profits on plant asset transfers.

4. Adjust the calculations of noncontrolling interest share in the presence of intercompany profits on plant asset transfers.


6-2

1: TRANSFERS OF PLANT ASSETS



6-3

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


6-4

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.


6-5

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) = $7Elimination entry for 2009 Worksheet

Gain on sale of land (-Ga, -SE) 10

Land (-A) 10


6-6

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) = $8Elimination entry for Worksheets in 2012 to 2014

Investment in San (+A) 10

Land (-A) 10


6-7

2015 Calculations

Recognize the previously deferred gain, with full effect to Pak

Pak's Income from San90%(90) + 10 = $91

Noncontrolling interest share10%(90) = $9

Elimination entry for 2015 Worksheet

Investment in San (+A) 10

Gain on sale of land (Ga, +SE) 10


6-8

2: DEFERRING UNREALIZED PROFITS



6-9

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


6-10

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


6-11

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.


6-12

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) – 30 + 6 = $32 Noncontrolling interest share

20%(70) = $14Elimination entry for 2011 WorksheetGain on sale of machinery (-Ga, -SE) 30

Machinery (-A) 30Accumulated depreciation (+A) 6

Depreciation expense (-E, +SE) 6Copyright ©2012 Pearson Education,

Inc. Publishing as Prentice Hall6-13

3: RECOGNIZING REALIZED, PREVIOUSLY DEFERRED PROFITS



6-14

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


6-15


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

Per's Income from Sop80%(80) + 6 = $70


Elimination entry for Worksheets in 2012Investment in Sop (+A) 24 Accumulated depreciation (+A) 6


Depreciation expense (-E, +SE) 6Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

6-16

Entries (cont.)

Worksheet entries for 2013


Investment in Sop (+A) 18 Accumulated depreciation (+A) 12


Depreciation expense (-E, +SE) 6

Investment in Sop (+A) 12 Accumulated depreciation (+A) 18


Depreciation expense (-E, +SE) 6Copyright ©2012 Pearson Education,


2015 Calculations

Recognize the remaining deferred gain, with full effect to Per

Per's Income from Sop80%(90) + 6 = $78


Elimination entries for 2015 WorksheetInvestment in Sop (+A) 6

Accumulated depreciation (+A) 24Machinery (-A) 30

Accumulated depreciation (+A) 6Depreciation expense (-E, +SE) 6Copyright ©2012 Pearson Education,


4: IMPACT ON NONCONTROLLING INTEREST



6-19

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 interestsUpstream sales impact noncontrolling interests!


6-20

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 2015. Shovel's income is $70 in 2011, $80 per year for 2012 to 2014, and $90 in 2015.


6-21

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 – 40 + 8) = $26.6 Noncontrolling interest share

30%(70 – 40 + 8) = $11.4Elimination entry for 2011 Worksheet

Gain on sale of machinery (-Ga, -SE) 40 Machinery (-A) 40

Accumulated depreciation (+A) 8Depreciation expense (-E, +SE) 8Copyright ©2012 Pearson Education,



Continue to recognize part of the gain, sharing its effect between the controlling and noncontrolling interests

Pail's Income from Shovel70%(80 + 8) = $61.6

Noncontrolling interest share30%(80 + 8) = $26.4


6-23

2012 Worksheet Entries

Elimination entry for Worksheets in 2012

Investment in Shovel (+A) 22.4

Noncontrolling interest (-SE) 9.6Accumulated depreciation (+A) 8.0

Machinery (-A) 40.0Accumulated depreciation (+A) 8.0

Depreciation expense (-E, +SE) 8.0


6-24




Noncontrolling interests (-SE) 7.2Accumulated depreciation (+A) 16.0

Machinery (-A) 40Accumulated depreciation (+A) 8.0



6-25




Noncontrolling interest (-SE) 4.8Accumulated depreciation (+A) 24.0




6-26

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) = $29.4Elimination entries for 2015 Worksheet


Noncontrolling interests (-SE) 2.4Accumulated depreciation (+A) 32.0


Gain on sale of machinery (Ga, +SE) 8.0Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall

6-27

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


6-28

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) XXXAccumulated depreciation (+A) X

Depreciation expense (-E, +SE) X


6-29

beams11_ppt06-intercompany plant asset

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unrealized gain

deferred gain

plant asset transfers

san a10 gain