chapter 6: intercompany profit transactions - plant assets
TRANSCRIPT
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Chapter 6: Intercompany Profit Transactions – Plant Assets
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompanyAdvanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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Intercompany Profits – Plant Assets: Objectives1. 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.
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1: Transfers of Plant Assets1: Transfers of Plant AssetsIntercompany Profit Transactions – Plant Assets
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Intercompany Fixed Asset SalesIntercompany 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
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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.
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2009 CalculationsDefer 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
Gain on sale of land 10 Land 10
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2010 to 2012 CalculationsContinue 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
Investment in Stan 10 Land 10
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2013 CalculationsRecognize 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
Investment in Stan 10 Gain on sale of land 10
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2: Deferring Unrealized Profits2: Deferring Unrealized ProfitsIntercompany Profit Transactions – Plant Assets
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Unrealized Profits on Fixed AssetsUnrealized 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
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Depreciable Fixed AssetsGains 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
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Downstream ExamplePerry 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.
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2009 CalculationsDefer the unrealized gain and amortize it over 5
years with full effect to Perry30 gain / 5 years = $6
• Perry's Income from Soper80%(70) – 30 + 6 = $32
• Noncontrolling interest share20%(70) = $14
Elimination entry for 2009 Worksheet
Gain on sale of equipment 30 Equipment 30
Accumulated depreciation 6Depreciation expense 6
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3: Recognizing Realized, Previously 3: Recognizing Realized, Previously Deferred ProfitsDeferred Profits
Intercompany Profit Transactions – Plant Assets
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Previously Deferred Gains/LossesRecognize 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
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2010 to 2012 CalculationsContinue 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 2010Investment in Soper 24 Accumulated depreciation 6
Equipment 30Accumulated depreciation 6
Depreciation expense 6
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Entries (cont.)Worksheet entries for 2011
Worksheet entries for 2012
Investment in Soper 18 Accumulated depreciation 12
Equipment 30Accumulated depreciation 6
Depreciation expense 6
Investment in Soper 12 Accumulated depreciation 18
Equipment 30Accumulated depreciation 6
Depreciation expense 6
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2013 CalculationsRecognize 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 WorksheetInvestment in Soper 6 Accumulated depreciation 24
Equipment 30Accumulated depreciation 6
Depreciation expense 6
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4: Impact on Noncontrolling Interest4: Impact on Noncontrolling InterestIntercompany Profit Transactions – Plant Assets
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Sharing Unrealized Gain or LossUpstream 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!
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Upstream ExamplePail owns 70% of Shovel, acquired at cost equal to
fair value. On 1/1/09, Shovel sells equipment to Pail at a $40 profit. The equipment has a remaining life of 5 years from 1/1/09. Pail Uses the equipment for four years, then sells it at a profit at the start of 2013. Shovel's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.
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2009 CalculationsDefer the unrealized gain and amortize it over 5
years sharing the gain40 gain / 5 years = $8
• Pail's Income from Shovel70%(70 – 40 + 8) = $26.6
• Noncontrolling interest share30%(70 – 40 + 8) = $11.4
Elimination entry for 2009 WorksheetGain on sale of equipment 40
Equipment 40Accumulated depreciation 8
Depreciation expense 8
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2010 to 2012 CalculationsContinue 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
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2010 Worksheet EntriesElimination entry for Worksheets in 2010
Investment in Shovel 22.4 Noncontrolling interest 9.6Accumulated depreciation 8.0
Equipment 40.0Accumulated depreciation 8.0
Depreciation expense 8.0
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2011 Worksheet EntriesWorksheet entries for 2011
Investment in Shovel 16.8 Noncontrolling interests 7.2Accumulated depreciation 16.0
Equipment 40Accumulated depreciation 8.0
Depreciation expense 8.0
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2012 Worksheet EntriesWorksheet entries for 2012
Investment in Shovel 11.2 Noncontrolling interest 4.8Accumulated depreciation 24.0
Equipment 40.0Accumulated depreciation 8.0
Depreciation expense 8.0
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2013 CalculationsRecognize 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 2013 WorksheetInvestment in Shovel 5.6 Noncontrolling interests 2.4Accumulated depreciation 32.0
Equipment 40.0Accumulated depreciation 8.0
Gain on sale of equipment 8.0
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Sale at Other Than Fair ValueIntercompany 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
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Inventory Items Fixed AssetsAn 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 XXX Equipment XXX
Accumulated depreciation XDepreciation expense X
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