beams11_ppt06-intercompany plant asset
TRANSCRIPT
to accompanyAdvanced Accounting, 11th edition
by Beams, Anthony, Bettinghaus, and Smith
Chapter 6:
Intercompany Profit Transactions – Plant Assets
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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.
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1: TRANSFERS OF PLANT ASSETS
Intercompany Profit Transactions – Plant Assets
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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
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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.
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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
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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
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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
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2: DEFERRING UNREALIZED PROFITS
Intercompany Profit Transactions – Plant Assets
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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
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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
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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.
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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,
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3: RECOGNIZING REALIZED, PREVIOUSLY DEFERRED PROFITS
Intercompany Profit Transactions – Plant Assets
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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
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2012 to 2014 Calculations
Continue to recognize part of the gain, with full effect to Per
Per's Income from Sop80%(80) + 6 = $70
Noncontrolling interest share20%(80) = $16
Elimination entry for Worksheets in 2012Investment in Sop (+A) 24 Accumulated depreciation (+A) 6
Machinery (-A) 30Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
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Entries (cont.)
Worksheet entries for 2013
Worksheet entries for 2014
Investment in Sop (+A) 18 Accumulated depreciation (+A) 12
Machinery (-A) 30Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6
Investment in Sop (+A) 12 Accumulated depreciation (+A) 18
Machinery (-A) 30Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6Copyright ©2012 Pearson Education,
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2015 Calculations
Recognize the remaining deferred gain, with full effect to Per
Per's Income from Sop80%(90) + 6 = $78
Noncontrolling interest share20%(90) = $18
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,
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4: IMPACT ON NONCONTROLLING INTEREST
Intercompany Profit Transactions – Plant Assets
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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!
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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.
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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,
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2012 to 2014 Calculations
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
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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
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2013 Worksheet Entries
Worksheet entries for 2013
Investment in Shovel (+A) 16.8
Noncontrolling interests (-SE) 7.2Accumulated depreciation (+A) 16.0
Machinery (-A) 40Accumulated depreciation (+A) 8.0
Depreciation expense (-E, +SE) 8.0
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2014 Worksheet Entries
Worksheet entries for 2014
Investment in Shovel (+A) 11.2
Noncontrolling interest (-SE) 4.8Accumulated depreciation (+A) 24.0
Machinery (-A) 40.0Accumulated depreciation (+A) 8.0
Depreciation expense (-E, +SE) 8.0
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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
Investment in Shovel (+A) 5.6
Noncontrolling interests (-SE) 2.4Accumulated depreciation (+A) 32.0
Machinery (-A) 40.0Accumulated depreciation (+A) 8.0
Gain on sale of machinery (Ga, +SE) 8.0Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall
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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
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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
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