7 - 0 advanced accounting by debra jeter and paul chaney chapter 7: elimination of unrealized gains...
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Advanced Accounting by Debra Jeter and Paul Chaney
Chapter 7: Elimination of Unrealized
Gains or Losses on Intercompany
Sales of Property and EquipmentSlides Authored by Hannah Wong, Ph.D.
Rutgers University
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Intercompany Sales of Land(Nondepreciable Property)
Parent Company
Subsidiary
Downstream SaleUpstream Sale
Land
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Financial Reporting Objectives
To defer unrealized intercompany gains or losses until such property is sold to parties outside the affiliated group
To present such property in the consolidated balance sheet at its cost to the affiliated group
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Upstream Sales - LandAn Example
80% owned
Subsidiary Parent
Company
Sells land for $500,000Purchased
land for $300,000
S records gain on sale of land of $200,000
Sells to outside
party for $550,000 years later
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Upstream Sales - Land
Cost and Partial Equity Methods
Gain on sale of land 200,000
Land200,000
To reduce the land to its historical cost paid by the selling affiliate
To exclude the unrealized gain from consolidated
net income
Year of Intercompany Sale - EE
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Upstream Sales - Land
Cost and Partial Equity Methods
Beginning R/E - P ($200,000 x 80%) 160,000
Beginning R/E - S ($200,000 x 20%) 40,000
Land 200,000
To reduce the land to its historical cost paid by the selling affiliate
Parent’s share of the unrealized gain
Years after Intercompany Sale - EE
Noncontrolling interests’ share of the unrealized gain
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Upstream Sales - Land
Cost and Partial Equity Methods
Beginning R/E - P ($200,000 x 80%) 160,000
Beginning R/E - S ($200,000 x 20%) 40,000
Gain on sale of land200,000
To record intercompany gain on sale of land, which is realized
in the current year
Parent’s share of the unrealized gain
Year of Sale to Outside Party - EE
Noncontrolling interests’ share of the unrealized gain
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Upstream Sales - LandComplete Equity Method
Equity in subsidiary income 160,000
Investment in S 160,000
To exclude the parent’s
share of the unrealized
gain from equity in
subsidiary income
Year of Intercompany Sales - Journal Entry
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Upstream Sales - Land
Complete Equity Method
Gain on sale of land 200,000
Land200,000
To reduce the land to its historical cost paid by the selling affiliate
To exclude the unrealized gain from consolidated
net income
Year of Intercompany Sale - EE
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Upstream Sales - LandComplete Equity Method
Years after Intercompany Sale - EE
Investment in S 160,000
Beginning retained earnings - S 40,000
Land 200,000
Parent’s share of the unrealized gain
Noncontrolling interests’ share of the unrealized gain
To reduce the land to its historical cost paid by the selling affiliate
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Upstream Sales - LandComplete Equity Method
Year of Sale to Outside Party - EE
Investment in S 160,000
Beginning retained earnings - S 40,000
Gain on sale of land 200,000
Parent’s share of the unrealized gain
Noncontrolling interests’ share of the unrealized gain
To record intercompany gain on sale of land, which is realized
in the current year
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Intercompany Sales Depreciable Property
Parent Company
Subsidiary
Downstream Sale Upstream Sale
Machinery, Equipment
or Building
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Financial Reporting Objectives
To defer unrealized intercompany gains or losses until such property is sold to parties outside the affiliated group
To present the depreciable property and related accounts (accumulated depreciation and depreciation expense) in the consolidated balance sheet based on its historical cost to the affiliated group
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Downstream Sales - EquipmentAn Example
Parent Company
90% owned Subsidiary
Parent has recorded $600,000 Acc. Dep. On the
equipment
Sold on 1/1/2002
for $900,000Purchasedequipment for
$1,350,000
Equipment has remaining useful life of 3
years
Note: it is the parent who records the intercompany profit, thus the parent’s
income needs to be adjusted in consolidation
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Downstream Sales - Equipment
All Methods
Equipment (1,350,000-900,000) 450,000
Gain on sale of equipment 150,000
Accumulated depreciation 600,000
To restore the equipment to its historical cost
To eliminate the unrealized gain
Year of Intercompany Sale
To restore the accumulated depreciation to its balance
on the date of intercompany sale
The Equipment EE
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Downstream Sales - Equipment
All Methods
Accumulated Depreciation 50,000
Depreciation Expense 50,000
To adjust depreciation expense from the recorded amount to the amount based on the original historical cost of equipment
Year of Intercompany Sale
The Depreciation EE
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Downstream Sales - Equipment
Cost or Partial Equity Methods
Equipment (1,350,000-900,000) 450,000
Beginning retained earnings - P 150,000
Accumulated depreciation 600,000
Years after Intercompany Sale
To eliminate the unrealized gain
To restore the accumulated depreciation to its balance
on the date of intercompany sale
To restore the equipment to its historical costThe Equipment EE
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Downstream Sales - Equipment
Cost or Partial Equity Methods Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation 100,000
Beginning retained earnings - P 50,000
Depreciation Expense 50,000
Adjustment to current year’s depreciation expense
Adjustment to prioryears’ depreciation expense
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Downstream Sales - Equipment
Complete Equity Methods
Equipment (1,350,000-900,000) 450,000
Investment in S 150,000
Accumulated depreciation 600,000
Years after Intercompany Sale
To eliminate the unrealized gain from the investment
account
To restore the accumulated depreciation to its balance
on the date of intercompany sale
To restore the equipment to its historical costThe Equipment EE
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Downstream Sales - Equipment
Complete Equity Methods Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation 100,000
Investment in S 50,000
Depreciation Expense 50,000
Adjustment to current year’s depreciation expense
Adjustment to prioryears’ depreciation expense
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Upstream Sales - Equipment An Example
90% owned Subsidiary
Parent Company
Subsidiary has recorded $300,000 Acc. Dep. on the
equipment
Sold on 1/1/2002
for $600,000Purchasedequipment for
$800,000
Equipment has remaining useful life of 5
years
Note: it is the subsidiary who records the intercompany profit, thus the subsidiary’s
income needs to be adjusted in consolidation
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Upstream Sales - Equipment
Cost and Partial Equity Methods
Equipment (1,350,000-900,000) 450,000
Gain on sale of equipment 150,000
Accumulated depreciation 600,000
To restore the equipment to its historical cost
To eliminate the unrealized gain
Year of Intercompany Sale
To restore the accumulated depreciation to its balance
on the date of intercompany sale
The Equipment EE
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Upstream Sales - Equipment
Cost and Partial Equity Methods
Accumulated Depreciation 50,000
Depreciation Expense 50,000
To adjust depreciation expense from the recorded amount to the amount based on the original historical cost of equipment
Year of Intercompany Sale
The Depreciation EE
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Upstream Sales - Equipment
Cost and Partial Equity Methods
Beginning retained earnings - P 85,000
Beginning retained earnings - S 15,000
Equipment (800,000-600,000) 200,000
Accumulated depreciation 300,000
Years after Intercompany Sale
To eliminate the parent’s and noncontrolling interests’ shares of
unrealized gain recorded in prior years
To restore the accumulated depreciation to its balance on the date of
intercompany sale
To restore the equipment to its historical cost
The Equipment EE
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Upstream Sales - Equipment
Cost and Partial Equity Methods Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation 40,000
Depreciation Expense 20,000
Beginning retained earnings - P 17,000
Beginning retained earnings - P 3,000
Adjustment to current year’s depreciation expense
Adjustment to prioryears’ depreciation expense
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Upstream Sales - Equipment
Cost and Partial Equity Methods
Disposal of Equipment by Purchasing Affiliate
The Disposal EE
Beginning retained earnings - P 51,000
Beginning retained earnings - S 9,000
Gain on sale of equipment 60,000
iTo include the intercompany profit, which is realizedin the current year, in consolidated NI
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Noncontrolling Interest in Income
Reported income of S
Depreciation adjustment (gain realized through usage)
Adjusted NI of S
Noncontrolling %
Noncontrolling interest in income
x
Upstream Sales - Equipment Cost and Partial Equity Methods
Unrealized gain on upstream-sale of equipment
Upstream-sale unrealized profit in ending inventory
Upstream-sale realized profit in beginning inventory
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Controlling Interest in Income
Reported income of P
(Adjusted NI of S) x (P %)
Consolidated income
Upstream Sales - Equipment Cost and Partial Equity Methods
Downstream-sale realized profit in beginning inventory
Downstream-sale profit in ending inventory
Amortization of purchase differential
Unrealized gain on downstream-sale of equipment Depreciation adjustment (gain
realized through usage)
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Consolidated Retained Earnings
Reported R/E of P
P’s share of increase in S R/E since acquisition
Consolidated R/E
Upstream Sales - Equipment Cost and Partial Equity Methods
Downstream-sale profit in S’s ending inventory
P% x (Upstream-sale profit in P’s ending inventory)
Accumulative amortization of purchase differential
P% x (Unrealized gain on upstream-sale of equipment)
Unrealized gain on downstream sale of equipment
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Downstream Sales - Equipment
Complete Equity Method
Equity in subsidiary income 85,000
Investment in S 85,000
Year of Intercompany Sale - JE
to adjust subsidiary income downward for the unrealized gain on sale of equipment
The Gain JE:
Investment in S 17,000
Equity in subsidiary income 17,000
to adjust subsidiary income upward for the gain realized through usage
The Depreciation JE:
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Downstream Sales - Equipment Complete Equity Method
Equipment 100,000
Gain on sale of equipment 200,000
Accumulated depreciation 300,000
To restore the equipment to its historical cost
To eliminate the unrealized gain
Year of Intercompany Sale - EE
To restore the accumulated depreciation to its balance
on the date of intercompany sale
The Equipment EE
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Downstream Sales - Equipment Complete Equity Method
Year of Intercompany Sale - EE
Accumulated Depreciation 250,000
Depreciation Expense 20,000
To adjust depreciation expense from the recorded amount to the amount based on the original historical cost of equipment
The Depreciation EE
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Downstream Sales - EE
Complete Equity Method
Investment in S 85,000
Beginning retained earnings - S 15,000
Equipment 200,000
Accumulated depreciation 300,000
Years after Intercompany Sale - EE
To eliminate the unrealized gain from the investment
account and 1/1 R/E - S
To restore the accumulated depreciation to its balance on the
date of intercompany sale
To restore the equipment to its historical cost
The Equipment EE
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Downstream Sales - EE
Complete Equity Method Years after Intercompany Sale - EE
The Depreciation EE
Accumulated Depreciation 40,000
Investment in S 17,000
Beginning retained earnings - S 3,000
Depreciation Expense 20,000
Adjustment to current year’s depreciation expense
Adjustment to prioryears’ depreciation expense
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Downstream Sales - EE Complete Equity Method
Disposal of Equipment by Purchasing Affiliate
Investment in S 51,000
Equity in subsidiary income 51,000
To adjust subsidiary income upward for the realized intercompany gain on sale of equipment
The Disposal JE:
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Downstream Sales - EE Complete Equity Method
Disposal of Equipment by Purchasing Affiliate
The Disposal EE
Investment in S 51,000
Beginning retained earnings - S 9,000
Gain on sale of equipment 60,000
i
To include the intercompany
profit, which is realizedin the current year, in consolidated NI
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Advanced Accounting
by
Debra Jeter and Paul Chaney
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