slide 7-1. slide 7-2 elimination of unrealized gains or losses on intercompany sales of property and...
TRANSCRIPT
Slide 7-1
Slide 7-2
Elimination of UnrealizedElimination of UnrealizedGains or Losses onGains or Losses onIntercompany Sales ofIntercompany Sales ofProperty and EquipmentProperty and Equipment
Advanced Accounting, Fourth Edition
7777
Slide 7-3
1. Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements.
2. Explain the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements.
3. Explain when gains or losses on intercompany sales of depreciable assets should be recognized on a consolidated basis.
4. Explain the term “realized through usage.”
5. Describe the differences between upstream and downstream sales in determining consolidated net income and the controlling and noncontrolling interests in consolidated income.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Slide 7-4
6. Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company.
7. Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary.
8. Compute consolidated net income considering the effects of intercompany sales of depreciable assets.
9. Describe the eliminating entry needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.
10. Explain the basic principles used to record or eliminate intercompany interest, rent, and service fees.
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
Slide 7-5
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
When there have been intercompany sales of
nondepreciable property, workpaper entries are
necessary to:
Include gains or losses on the sale in consolidated net
income only at the time such property is sold to
parties outside the affiliated group and in an
amount equal to the difference between the cost of the
property to the affiliated group and the proceeds
received from outsiders.
Present nondepreciable property in the consolidated
balance sheet at its cost to the affiliated group.
Slide 7-6
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
E7-4 (variation): Procter Company owns 90% of the
outstanding stock of Silex Company. On January 1,
2011, Silex Company sold land to Procter Company for
$350,000. Silex had originally purchased the land on
June 30, 2007, for $200,000.
Procter Company plans to construct a building on the
land bought from Silex in which it will house new
production machinery. The estimated useful life of the
building and the new machinery is 15 years.
Upstream Sale
Slide 7-7
E7-4 (variation): Entries made on the books of each affiliate to record this intercompany sale in 2011.
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
Entry on Books of Silex
Cash 350,000
Land 200,000
Gain on sale150,000
Entry on Books of Procter
Land 350,000
Cash 350,000
Additional Entry for Complete Equity Method: Proctor Only
Equity in income135,000
Investment in Silex 135,000
To reduce its income from subsidiary by its share of the intercompany gain ($150,000 x 90%).
Note: No further entries are recorded on the books of Procter until the land is sold to outsiders.
Slide 7-8
E7-4: B(1). Prepare the workpaper entries necessary because of the intercompany sale of land for the year ended December 31, 2011.
Gain on Sale of Land 150,000
Land ($350,000 - $200,000) 150,000
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
To eliminate the $150,000 gain reported by Silex Company and to reduce the land balance from the $350,000 recorded on the books of Procter to its $200,000 cost to the affiliated group.
Slide 7-9
E7-4: B(2). Prepare the workpaper entries for the year ended December 31, 2012.
Cost Method and Partial Equity Method
Beg. Retained Earnings – Procter (90%) 135,000
Noncontrolling Interest (10%) 15,000
Land 150,000
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
Complete Equity Method
Investment in Silex Company (90%) 135,000
Noncontrolling Interest (10%) 15,000
Land 150,000
Upstream Sale
Slide 7-10
E7-4: Summary Points
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
1. Proctor (parent) continues to report the land on their statements at the intercompany selling price of $350,000. However, in the consolidated balance sheet, the land is reported at its cost to the affiliated group of $200,000.
2. If the intercompany seller had been the parent (downstream sale), the entire $150,000 would go to the controlling interest, resulting in a $150,000 debit to the beginning retained earnings of the parent company.
Slide 7-11
E7-6: P Company owns 90% of the outstanding common stock of S Company. On January 1, 2011, S Company sold land to P Company for $600,000. S Company originally purchased the land for $400,000.
On January 1, 2012, P Company sold the land purchased from S Company to a company outside the affiliated group for $700,000.
Required:
A. Calculate the amount of gain on the sale of the land that is recognized on the books of P Company in 2012.
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
Sales to Outsiders
Slide 7-12
Selling price to third party $ 700,000Cost of land to P Company 600,000Gain recognized by P Company $ 100,000
E7-6: A. Calculate the gain on the sale of the land that is recognized on the books of P Company in 2012.
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
B. Calculate the gain that should be recognized in the consolidated statements in 2012.
Selling price to third party $ 700,000Cost of land to affiliate group 400,000Gain recognized in consolidation $ 300,000
Slide 7-13
E7-6: C. Prepare the workpaper entries for the year ended December 31, 2012.
Cost Method and Partial Equity Method
Beg. Retained Earnings – Procter (90%) 180,000
Noncontrolling Interest (10%) 20,000
Gain on Sale of Land 200,000 *
Intercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyPropertyIntercompany Sales of Nondepreciable Intercompany Sales of Nondepreciable PropertyProperty
LO 1 Financial reporting objectives nondepreciable property.LO 1 Financial reporting objectives nondepreciable property.
Complete Equity Method
Investment in Silex Company (90%) 180,000
Noncontrolling Interest (10%) 20,000
Gain on Sale of Land 200,000 *
* Gain recognized in consolidation less gain recognized by P Company ($300,000 - $100,000 = $200,000).
Slide 7-14
A firm may sell property or equipment to an affiliate for a price that differs from its book value.
From the view of the consolidated entity, the intercompany gain (loss) is considered to be realized from the use of the property or equipment in the generation of revenue. The use is measured by depreciation adjustments.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty(Machinery, Equipment, and Buildings)(Machinery, Equipment, and Buildings)
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty(Machinery, Equipment, and Buildings)(Machinery, Equipment, and Buildings)
Realization through Usage
LO 4 Intercompany gain realized through usage.LO 4 Intercompany gain realized through usage.
Slide 7-15
When there have been intercompany sales of depreciable property, workpaper entries are necessary:
To report only those gains or losses that result from the sale of depreciable property to outside parties.
To present property in the consolidated balance sheet at its cost to the affiliated group.
To present accumulated depreciation in the consolidated balance sheet based on the cost to the affiliated group.
To present depreciation expense in the consolidated income statement based on the cost to the affiliated group.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty(Machinery, Equipment, and Buildings)(Machinery, Equipment, and Buildings)
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty(Machinery, Equipment, and Buildings)(Machinery, Equipment, and Buildings)
LO 2 Financial reporting objectives— depreciable property.LO 2 Financial reporting objectives— depreciable property.
Slide 7-16
A firm may sell property or equipment to an affiliate for a price that differs from its book value.
From the view of the consolidated entity, the intercompany gain (loss) is considered to be realized from the use of the property or equipment in the generation of revenue.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty(Machinery, Equipment, and Buildings)(Machinery, Equipment, and Buildings)
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty(Machinery, Equipment, and Buildings)(Machinery, Equipment, and Buildings)
Workpaper Elimination Entries
LO 2 Financial reporting objectives— depreciable property.LO 2 Financial reporting objectives— depreciable property.
Slide 7-17
P7-1 (Cost or Partial Equity): Powell Company owns 80% of the outstanding common stock of Sullivan Company. On June 30, 2011, Sullivan Company sold equipment to Powell Company for $500,000. The equipment cost Sullivan Company $780,000 and had accumulated depreciation of $400,000 on the date of the sale. The management of Powell Company estimated that the equipment had a remaining useful life of four years from June 30, 2011. In 2012, Powell Company reported $300,000 and Sullivan Company reported $200,000 in net income from their independent operations (including sales to affiliates but excluding dividend or equity income from subsidiary).
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Subsidiary vs. parent as the seller.LO 6 Subsidiary vs. parent as the seller.
Upstream Sale
Slide 7-18
Powell Company
Equipment 500,000Cash 500,000
Sullivan Company
Cash 500,000Accumulated Depreciation 400,000
Equipment 780,000Gain on Sale of Equipment 120,000
P7-1: Entries on the books of Powell and Sullivan to record the intercompany sale are:
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Subsidiary vs. parent as the seller.LO 6 Subsidiary vs. parent as the seller.
Slide 7-19
Equipment 280,000
Gain on Sale of Equipment 120,000
Accumulated Depreciation 400,000
To eliminate the intercompany gain and restore equipment to its original cost to the consolidated entity.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyP7-1: A. Prepare the workpaper entries necessary because of the sale of equipment for the year ended December 31, 2011.Accumulated Carrying Depreciation
Cost Depreciation Value Life Expense
Original Cost 780,000$ 400,000$ 380,000$ 4 yr 95,000$
Selling Price 500,000 500,000 4 yr 125,000
Diff erence 280,000$ 400,000$ (120,000)$ (30,000)$
LO 6 Subsidiary vs. parent as the seller.LO 6 Subsidiary vs. parent as the seller.
2011
Slide 7-20
Accumulated Depreciation - Equipment 15,000
Depreciation Expense ($30,000/2) 15,000
To adjust depreciation expense to the correct amount to the consolidated entity, thus realizing a portion of the gain through usage.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyP7-1: A. Prepare the workpaper entries necessary because of the sale of equipment for the year ended December 31, 2011.Accumulated Carrying Depreciation
Cost Depreciation Value Life Expense
Original Cost 780,000$ 400,000$ 380,000$ 4 yr 95,000$
Selling Price 500,000 500,000 4 yr 125,000
Diff erence 280,000$ 400,000$ (120,000)$ (30,000)$
LO 6 Subsidiary vs. parent as the seller.LO 6 Subsidiary vs. parent as the seller.
2011
Slide 7-21
P7-1: A. Prepare the workpaper entries necessary because of the sale of equipment for the year ended December 31, 2012.Accumulated Carrying Depreciation
Cost Depreciation Value Life Expense
Original Cost 780,000$ 400,000$ 380,000$ 4 yr 95,000$
Selling Price 500,000 500,000 4 yr 125,000
Diff erence 280,000$ 400,000$ (120,000)$ (30,000)$
Equipment (to original cost) 280,000
Beg. Retained Earnings - Powell ($120,000 x80%)96,000
Noncontrolling Interest ($120,000 x 20%) 24,000
Accumulated Depreciation - Equipment 400,000
To eliminate prior period intercompany gain and restore equipment to its original cost to the consolidated entity.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 7 Computing the noncontrolling interest.LO 7 Computing the noncontrolling interest.
2012
Slide 7-22
P7-1: A. Prepare the workpaper entries necessary because of the sale of equipment for the year ended December 31, 2012.Accumulated Carrying Depreciation
Cost Depreciation Value Life Expense
Original Cost 780,000$ 400,000$ 380,000$ 4 yr 95,000$
Selling Price 500,000 500,000 4 yr 125,000
Diff erence 280,000$ 400,000$ (120,000)$ (30,000)$
Accumulated Depreciation - Equipment 45,000
Depreciation Expense ($120,000/4) 30,000
Beg. Retained Earnings – Powell ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
To adjust depreciation for the current and prior year on equipment sold to affiliate.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 7 Computing the noncontrolling interest.LO 7 Computing the noncontrolling interest.
2012
Slide 7-23
P7-1 (variation): For the Compete Equity Method, the 2012 workpaper entries would have changed as follows:Equipment (to original cost) 280,000
Investment in Sullivan ($120,000 x80%) 96,000
Noncontrolling Interest ($120,000 x 20%) 24,000
Accumulated Depreciation - Equipment 400,000
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 7 Computing the noncontrolling interest.LO 7 Computing the noncontrolling interest.
Accumulated Depreciation - Equipment 45,000
Depreciation Expense ($120,000/4) 30,000
Investment in Sullivan ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
Slide 7-24
P7-1 (variation): If this had been a Downstream sale, the 2012 entries would have changed as follows:
Cost or Partial Equity
Noncontrolling interest of 20% would be included in Beginning Retained Earnings of Powell Company.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 7 Computing the noncontrolling interest.LO 7 Computing the noncontrolling interest.
Complete Equity Method
Noncontrolling interest of 20% would be included in Investment in Sullivan.
There is no differentiation between Controlling interest and Noncontrolling interest with Downstream
Intercompany Sales.
Slide 7-25
P7-6 (Cost Method): Pitts Company owns 80% of the common stock of Shannon Company. The stock was purchased for $960,000 on January 1, 2009, when Shannon Company’s retained earnings were $675,000. On January 1, 2011, Shannon Company sold fixed assets to Pitts Company for $960,000; Shannon Company had purchased these assets for $1,350,000 on January 1, 2001, at which time their estimated useful life was 25 years. The estimated remaining useful life to Pitts Company on 1/1/11 is 10 years. Both companies employ the straight-line method of depreciation.
Required: A. Prepare a consolidated statements workpaper for the year ended December 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
Year Subsequent to Intercompany SaleUpstream Sale
Slide 7-26
ConsolidatedIncome Statement Pitts Shannon Debit Credit NCI BalancesSales 1,950,000$ 1,350,000$ 3,300,000$ Dividend income 60,000 60,000 -
Total revenue 2,010,000 1,350,000 3,300,000 Cost of goods sold 1,350,000 900,000 2,250,000 Other expenses 225,000 150,000 15,000 360,000
Total cost and expense 1,575,000 1,050,000 2,610,000 Net income 435,000 300,000 690,000 Noncontrolling interest 63,000 (63,000) Net income 435,000$ 300,000$ 60,000$ 15,000$ 63,000$ 627,000$
Retained Earnings StatementRetained earnings, 1/1
Pitts 1,215,000 120,000 290,400 1,397,400 12,000
Shannon 1,038,000 1,038,000 - Net income 435,000 300,000 60,000 15,000 63,000 627,000 Dividends declared (150,000) (75,000) 60,000 (15,000) (150,000) Retained earnings, 12/31 1,500,000$ 1,263,000$ 1,218,000$ 377,400$ 48,000$ 1,874,400$
EliminationsP7-6 (Cost Method):
(4)
(3
)
(1)
(2)
(5)
(4
)
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
(3)
Slide 7-27
ConsolidatedBalance Sheet Pitts Shannon Debit Credit NCI BalancesInventory 498,000$ 225,000$ 723,000$ Investment in S 960,000 290,400 1,250,400 - Fixed assets 2,168,100 2,625,000 390,000 5,183,100 Accum. Depreciation (900,000) (612,000) 30,000 540,000 (2,022,000)
Total assets 2,726,100$ 2,238,000$ 3,884,100$ -
Liabilities 465,600$ 450,000$ 915,600$ Common stock 760,500 525,000 525,000 760,500 Retained earnings 1,500,000 1,263,000 1,218,000 377,400 48,000 1,874,400 NCI in net assets 30,000 312,600 285,600 -
3,000 333,600 333,600
Total liab. & equity 2,726,100$ 2,238,000$ 2,483,400$ 2,483,400$ 3,884,100$
Eliminations
(2)
(3)
(5)
(5)
(2)
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
(1
)
(5
)(2)
(3)
P7-6 (Cost Method):
Slide 7-28
Acquisition date retained earnings - Shannon$ 675,000Retained earnings 1/1/12 - Shannon 1,038,000Increase 363,000Ownership percentage 80%
$ 290,400
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
Investment in Shannon Company 290,400
Retained Earnings – Pitts290,400
To establish reciprocity/convert to equity
1.
Slide 7-29
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
2. Plant and Equipment 390,000
Retained Earnings – Pitts ($150,000 x 80%) 120,000
Noncontrolling Interest ($150,000 x 20%) 30,000
Accumulated Depreciation 540,000To reduce controlling and noncontrolling interests for their shares of unrealized intercompany profit at beg. of year, to restore fixed assets to its book value to the selling affiliate on the date of the intercompany sale
Accumulated Carrying DepreciationCost Depreciation Value Life Expense
Original Cost 1,350,000$ 540,000$ 810,000$ 10 yr 81,000$
Selling Price 960,000 960,000 10 yr 96,000
Diff erence 390,000$ 540,000$ (150,000)$ (15,000)$
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
Slide 7-30
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
3. Accumulated Depreciation 30,000
Other Expenses (Depreciation Expense) 15,000
Retained Earnings – Pitts ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
To reverse amount of excess depreciation recorded during year and to recognize an equivalent amount of intercompany profit as realized
Accumulated Carrying DepreciationCost Depreciation Value Life Expense
Original Cost 1,350,000$ 540,000$ 810,000$ 10 yr 81,000$
Selling Price 960,000 960,000 10 yr 96,000
Diff erence 390,000$ 540,000$ (150,000)$ (15,000)$
Slide 7-31
Dividend Income 60,000
Dividends Declared60,000
Beg. Retained Earnings - Shannon1,038,000
Common Stock - Shannon 525,000
Investment in Shannon1,250,400 Noncontrolling Interest
312,600
To eliminate intercompany dividends
To eliminate investment account and create NCI account
4.
5.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Slide 7-32
P7-12 (Partial Equity Method): Prather Company owns 80% of the common stock of Stone Company. The stock was purchased for $960,000 on January 1, 2009, when Stone Company’s retained earnings were $675,000. On January 1, 2011, Stone Company sold fixed assets to Prather Company for $960,000; Stone Company had purchased these assets for $1,350,000 on January 1, 2001, at which time their estimated useful life was 25 years. The estimated remaining useful life to Prather Company on 1/1/11 is 10 years. Both companies employ the straight-line method of depreciation.
Required: A. Prepare a consolidated statements workpaper for the year ended December 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
Year Subsequent to Intercompany SaleUpstream Sale
Slide 7-33
ConsolidatedIncome Statement Prather Stone Debit Credit NCI BalancesSales 1,950,000$ 1,350,000$ 3,300,000$ Equity in Sub. income 240,000 240,000 -
Total revenue 2,190,000 1,350,000 3,300,000 Cost of goods sold 1,350,000 900,000 2,250,000 Other expenses 225,000 150,000 15,000 360,000
Total cost and expense 1,575,000 1,050,000 2,610,000 Net income 615,000 300,000 690,000 Noncontrolling interest 63,000 (63,000) Net income 615,000$ 300,000$ 240,000$ 15,000$ 63,000$ 627,000$
Retained Earnings StatementRetained earnings, 1/1
Pitts 1,505,400 120,000 12,000 1,397,400 Shannon 1,038,000 1,038,000 -
Net income 615,000 300,000 240,000 15,000 63,000 627,000 Dividends declared (150,000) (75,000) 60,000 (15,000) (150,000) Retained earnings, 12/31 1,970,400$ 1,263,000$ 1,398,000$ 87,000$ 48,000$ 1,874,400$
EliminationsP7-12 (Partial Equity Method):
(1)
(3
)
(3)
(2)(4)
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
(1)
Slide 7-34
ConsolidatedBalance Sheet Prather Stone Debit Credit NCI BalancesInventory 498,000$ 225,000$ 723,000$ Investment in Stone 1,430,400 1,250,400 -
180,000 Fixed assets 2,168,100 2,625,000 390,000 5,183,100 Accum. Depreciation (900,000) (612,000) 30,000 540,000 (2,022,000)
Total assets 3,196,500$ 2,238,000$ 3,884,100$ -
Liabilities 465,600$ 450,000$ 915,600$ Common stock 760,500 525,000 525,000 760,500 Retained earnings 1,970,400 1,263,000 1,398,000 87,000 48,000 1,874,400 NCI in net assets 30,000 312,600 285,600 -
3,000 333,600 333,600
Total liab. & equity 3,196,500$ 2,238,000$ 2,373,000$ 2,373,000$ 3,884,100$
Eliminations
(1)(2
)
(4)
(3)
(2)
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
(4
)
(4)
P7-12 (Partial Equity Method):
(3)
(2)
Slide 7-35
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
Equity In Subsidiary Income 240,000
Dividends Declared ($75,000 x 80%)60,000
Investment in Stone Company180,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income
1.
Slide 7-36
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
2. Plant and Equipment 390,000
Retained Earnings – Prather ($150,000 x 80%) 120,000
Noncontrolling Interest ($150,000 x 20%) 30,000
Accumulated Depreciation 540,000To reduce controlling and noncontrolling interests for their shares of unrealized intercompany profit at beg. of year, to restore fixed assets to its book value to the selling affiliate on the date of the intercompany sale
Accumulated Carrying DepreciationCost Depreciation Value Life Expense
Original Cost 1,350,000$ 540,000$ 810,000$ 10 yr 81,000$
Selling Price 960,000 960,000 10 yr 96,000
Diff erence 390,000$ 540,000$ (150,000)$ (15,000)$
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
Slide 7-37
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
3. Accumulated Depreciation 30,000
Other Expenses (Depreciation Expense) 15,000
Retained Earnings – Prather ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
To reverse amount of excess depreciation recorded during year and to recognize an equivalent amount of intercompany profit as realized
Accumulated Carrying DepreciationCost Depreciation Value Life Expense
Original Cost 1,350,000$ 540,000$ 810,000$ 10 yr 81,000$
Selling Price 960,000 960,000 10 yr 96,000
Diff erence 390,000$ 540,000$ (150,000)$ (15,000)$
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
Slide 7-38
Beg. Retained Earnings - Stone 1,038,000
Common Stock - Stone 525,000
Investment in Stone1,250,400 Noncontrolling Interest
312,600To eliminate investment account and create NCI account
4.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Workpaper entries-upstream sales.LO 6 Workpaper entries-upstream sales.
* (($1,263,000 - $675,000) x 80%) - $180,000 = $290,400 + $960,000 = $1,250,400
** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
*
**
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
Slide 7-39
P7-16 (Complete Equity Method): Prather Company owns 80% of the common stock of Stone Company. The stock was purchased for $960,000 on January 1, 2009, when Stone Company’s retained earnings were $675,000. On January 1, 2011, Stone Company sold fixed assets to Prather Company for $960,000; Stone Company had purchased these assets for $1,350,000 on January 1, 2001, at which time their estimated useful life was 25 years. The estimated remaining useful life to Prather Company on 1/1/11 is 10 years. Both companies employ the straight-line method of depreciation.
Required: A. Prepare a consolidated statements workpaper for the year ended December 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
Upstream SaleYear Subsequent to Intercompany Sale
Slide 7-40
ConsolidatedIncome Statement Panther Stone Debit Credit NCI BalancesSales 1,950,000$ 1,350,000$ 3,300,000$ Equity in Stone income 252,000 252,000 -
Total revenue 2,202,000 1,350,000 3,300,000 Cost of goods sold 1,350,000 900,000 2,250,000 Other expenses 225,000 150,000 15,000 360,000
Total cost and expense 1,575,000 1,050,000 2,610,000 Net income 627,000 300,000 690,000 Noncontrolling interest 63,000 (63,000) Net income 627,000$ 300,000$ 252,000$ 15,000$ 63,000$ 627,000$
Retained Earnings StatementRetained earnings, 1/1
Panther 1,397,400 1,397,400 Stone 1,038,000 1,038,000 -
Net income 627,000 300,000 252,000 15,000 63,000 627,000 Dividends declared (150,000) (75,000) 60,000 (15,000) (150,000) Retained earnings, 12/31 1,874,400$ 1,263,000$ 1,290,000$ 75,000$ 48,000$ 1,874,400$
EliminationsP7-16 (Complete Equity Method):
(1)
(3
)
(1)
(5)
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
Slide 7-41
ConsolidatedBalance Sheet Panther Stone Debit Credit NCI BalancesInventory 498,000$ 225,000$ 723,000$ Investment in S 1,334,400 120,000 192,000 -
12,000 1,250,400
Fixed assets 2,168,100 2,625,000 390,000 5,183,100 Accum. Depreciation (900,000) (612,000) 30,000 540,000 (2,022,000)
Total assets 3,100,500$ 2,238,000$ 3,884,100$ -
Liabilities 465,600$ 450,000$ 915,600$ Common stock 760,500 525,000 525,000 760,500 Retained earnings 1,874,400 1,263,000 1,290,000 75,000 48,000 1,874,400 NCI in net assets 30,000 312,600 285,600 -
3,000 333,600 333,600
Total liab. & equity 3,100,500$ 2,238,000$ 2,385,000$ 2,385,000$ 3,884,100$
Eliminations
(4)
(5)
(4)
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
(2
)
(1
)
(3)
P7-16 (Complete Equity Method):
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
(3)
(2
)(3
)
(2
)
(2)
Slide 7-42
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
Equity in Subsidiary Income 252,000
Dividends Declared ($75,000 x 80%)60,000
Investment in Stone Company192,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income
1.
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
Slide 7-43
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
2. Plant and Equipment 390,000
Investment in Stone ($150,000 x 80%) 120,000
Noncontrolling Interest ($150,000 x 20%) 30,000
Accumulated Depreciation 540,000To reduce controlling and noncontrolling interests for their shares of unrealized intercompany profit at beg. of year, to restore the carrying value of equipment to its book value on the date of the intercompany sale
Accumulated Carrying DepreciationCost Depreciation Value Life Expense
Original Cost 1,350,000$ 540,000$ 810,000$ 10 yr 81,000$
Selling Price 960,000 960,000 10 yr 96,000
Diff erence 390,000$ 540,000$ (150,000)$ (15,000)$
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
Slide 7-44
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
3.
Accumulated Carrying DepreciationCost Depreciation Value Life Expense
Original Cost 1,350,000$ 540,000$ 810,000$ 10 yr 81,000$
Selling Price 960,000 960,000 10 yr 96,000
Diff erence 390,000$ 540,000$ (150,000)$ (15,000)$
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
Accumulated Depreciation 30,000
Other Expenses (Depreciation Expense) 15,000
Investment in Stone Company ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
To reverse amount of excess depreciation recorded during year and to recognize an equivalent amount of intercompany profit as realized
Slide 7-45
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
Intercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyPropertyIntercompany Sales of Depreciable Intercompany Sales of Depreciable PropertyProperty
LO 6 Upstream sales- complete equity method.LO 6 Upstream sales- complete equity method.
Beg. Retained Earnings - Stone 1,038,000
Common Stock - Stone 525,000
Investment in Stone 1,250,400 Noncontrolling Interest
312,600To eliminate investment account and create NCI account
4.
* (($1,263,000 - $675,000) x 8)%) - $180,000 = $290,400 + $960,000 = $1,250,400
** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
*
**
Slide 7-46
Under the Complete Equity Method:
Consolidated net income equals the parent company’s recorded income.
Consolidated retained earnings equals the parent company’s recorded retained earnings.
Calculation And Allocation Of Calculation And Allocation Of ConsolidatedConsolidatedNet Income; Consolidated Retained Net Income; Consolidated Retained Earnings:Earnings:Complete Equity MethodComplete Equity Method
Calculation And Allocation Of Calculation And Allocation Of ConsolidatedConsolidatedNet Income; Consolidated Retained Net Income; Consolidated Retained Earnings:Earnings:Complete Equity MethodComplete Equity Method
LO 8 Consolidated net income – complete equity method.LO 8 Consolidated net income – complete equity method.
Slide 7-47
Income and expenses relating to interest, fees, and rents should be reported in consolidation only when they arise from transactions with parties outside the affiliated group.
Intercompany Interest, Rents, and Intercompany Interest, Rents, and Service FeesService FeesIntercompany Interest, Rents, and Intercompany Interest, Rents, and Service FeesService Fees
LO 10 Intercompany interest, rents, service fees.LO 10 Intercompany interest, rents, service fees.
Workpaper entry to eliminate intercompany interest:
Interest Income XXXInterest Expense XXX
Workpaper entry to eliminate intercompany payables and receivables:
Notes Payable XXXNotes Receivable XXX
Interest Payable XXXInterest Receivable XXX
Slide 7-48
Intercompany Interest, Rents, and Intercompany Interest, Rents, and Service FeesService FeesIntercompany Interest, Rents, and Intercompany Interest, Rents, and Service FeesService Fees
LO 10 Intercompany interest, rents, service fees.LO 10 Intercompany interest, rents, service fees.
Workpaper entry to eliminate intercompany rent:
Rent Income XXXRent Expense XXX
When one affiliate charges fees to another, the form of the eliminating entry is determined by how the transaction is recorded by the affiliates.
Intercompany Service Fees
Slide 7-49
Eliminating entries relating to intercompany transactions depend on how these transactions are recorded on the books of the affiliates. In all cases the financial reporting objectives are:
To include in revenue only the amounts that result from transactions with parties outside the affiliated group.
To present property in the consolidated balance sheet at its cost to the affiliated group.
To present accumulated depreciation in the consolidated balance sheet based on the cost to the affiliated group.
To present depreciation expense in the consolidated income statement based on the cost to the affiliated group.
Intercompany Interest, Rents, and Intercompany Interest, Rents, and Service FeesService FeesIntercompany Interest, Rents, and Intercompany Interest, Rents, and Service FeesService Fees
LO 10 Intercompany interest, rents, service fees.LO 10 Intercompany interest, rents, service fees.
Slide 7-50
Illustration: P Company owns a 70% interest in S Company
and that on January 1, 2008, S Company sells P Company
equipment with a book value of $500,000 (original cost of
$800,000 and accumulated depreciation of $300,000) for
$600,000. On January 1, 2008, the equipment has a remaining
useful life of five years and is depreciated using the straight-line
method. The marginal income tax rates for both companies are
40% and separate income tax returns are filed. S Company will
record a gain of $100,000 on the sale of the equipment and
each year P Company will record depreciation that is $20,000
greater than depreciation based on the cost of the equipment to
the selling affiliate. Workpaper eliminating entries in the
December 31, 2008, and December 31, 2009, consolidated
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
Slide 7-51
Illustration: Workpaper eliminating entries in the December 31, 2008, and December 31, 2009, consolidated statements workpapers relating to the unrealized profit on the intercompany sale of the equipment are illustrated below:
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
Slide 7-52
Since the selling affiliate is a partially owned subsidiary
(upstream sale), the calculation of the noncontrolling interest
in consolidated income requires that the after-tax amount of
gain recorded by the subsidiary (.60 x $100,000 = $60,000) be
subtracted from the reported net income of the subsidiary and
that the after-tax amount of the gain realized through
depreciation (.6 x $20,000 = $12,000) be added to the reported
net income of the subsidiary before multiplying by the
noncontrolling interest percentage. Assuming that S Company
reported net income of $144,000 in 2008, the noncontrolling
interest in consolidated income is $28,800 [.30 x ($144,000 -
$60,000 + $12,000)].
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
Slide 7-53
If the sale of equipment is downstream, no adjustments to the
reported net income of the subsidiary are necessary in the
calculation of the noncontrolling interest in consolidated
income.
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
APPENDIX - Deferred Tax Consequences APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Related to Intercompany Sales of EquipmentEquipment
Slide 7-54
Before calculating the deferred tax consequences relating lo
undistributed subsidiary income, the amount of undistributed
income must be adjusted for the after-tax amount of
unrealized intercompany profit recorded by the subsidiary
that has been recognized in the determination of
consolidated income.
APPENDIX - Impact of Unrealized APPENDIX - Impact of Unrealized Intercompany Profit on the Calculation of Intercompany Profit on the Calculation of Deferred Tax Consequences Related To Deferred Tax Consequences Related To Undistributed Subsidiary IncomeUndistributed Subsidiary Income
APPENDIX - Impact of Unrealized APPENDIX - Impact of Unrealized Intercompany Profit on the Calculation of Intercompany Profit on the Calculation of Deferred Tax Consequences Related To Deferred Tax Consequences Related To Undistributed Subsidiary IncomeUndistributed Subsidiary Income
Slide 7-55
When the affiliated companies file separate income tax returns,
the calculations of consolidated net income and consolidated
retained earnings must be modified to incorporate income tax
consequences.
Adjustments must now be made for the after-tax amounts of
unrealized intercompany profit.
Consolidated net income is reduced by the income tax
consequence of undistributed income for the current year.
Consolidated retained earnings is reduced by the income tax
consequence of undistributed income from the date of
acquisition to the date of the calculation.
APPENDIX – Calculations (and Allocations) APPENDIX – Calculations (and Allocations) of Consolidated net Income and of Consolidated net Income and Consolidated Retained Earnings.Consolidated Retained Earnings.
APPENDIX – Calculations (and Allocations) APPENDIX – Calculations (and Allocations) of Consolidated net Income and of Consolidated net Income and Consolidated Retained Earnings.Consolidated Retained Earnings.
Slide 7-56
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