Ch06: Inter-company Transactions

Question 1

Inter-company Transactions

Answer 1

Affiliated firms do business with each other through:

1. Supply chain transactions
2. Transfer of Assets
3. Financing
4. Services provided

Question 2

Single Economic Entity

Answer 2

The consolidated statements present the parent and the subsidiary as a single economic entity.

Question 3

Elimination of inter-company transactions

Answer 3

Inter-company transactions must be eliminated because these transactions don’t arise from transacting with arms-length parties.
Avoid overstating revenues and expenses; eliminate intercompany receivables and payables.
Gains and losses on asset-transfers are not confirmed via arms-length parties; eliminate gains and losses on intercompany asset transfers; intercompany profit from the asset-transfers are removed at the end of the period.

Question 4

Eliminating Entries (CIERON), (I) entry

Answer 4

The (I) entry eliminates intercompany transactions that result from upstream (parent) and downstream (subsidiary) transactions.

Question 5

Intercompany Service Transactions

Answer 5

The parent or the subsidiary may provide services to one another:
Eliminate revenue on the provider’s books.
Eliminate expenses on the receiver’s books.

Question 6

Intercompany Financing Transactions

Answer 6

The parent or the subsidiary may provide loans to one another:
Eliminate the loan receivable, interest receivable from the lender’s balance sheet; eliminate interest income from the lender’s income statement.
Eliminate the loan payable, interest payable from the borrower’s balance sheet; eliminate interest expense from the borrower’s income statement.

Question 7

Intercompany Profits

Upstream Profits, Downstream Profits

Answer 7

Intercompany profits result from asset transfers between entities.
Upstream profits result from asset-transfers to the parent.
Downstream profits result from asset-transfers to the subsidiary.

Question 8

Asset-transfers

Upstream, Downstream

Answer 8

Upstream asset-transfer: the parent is the recipient of the assets transferred.
Downstream asset-transfer: the subsidiary is the recipient of the assets transferred.

Question 9

ASC 810: Inter-company Profits

Answer 9

Profits not yet confirmed via sale to arms-length parties must be eliminated (upstream and downstream).

Transactions are not arms-length unless they’re conducted with outside parties;

Confirmed profits aren’t eliminated, but intercompany sales and related cost of sales must be eliminated.

Question 10

Noncontrolling Interests: Unconfirmed Profits; Downstream Sales

Answer 10

Downstream sales impact only the controlling interest’s net income.

Elimination of profit impacts:
Fully deduct unconfirmed profits from the controlling interest’s equity in net income.
No impact on the noncontrolling interest’s in net income.

Question 11

Noncontrolling Interests: Unconfirmed Profits; Upstream Sales

Answer 11

Upstream sales impact both the controlling interest’s and noncontrolling interest’s in net income according to the percentage of control and no control.

Elimination of profit impacts:
Controlling Interest, equity in net income
Noncontrolling Interest, net income

Question 12

Unconfirmed Profits, Inventory; not allocated

Answer 12

beg. inventory - [beg. inventory / (1 + markup)]

end. inventory - [end. inventory / (1 + markup)]

Question 13

Beginning Inventory, Downstream

Answer 13

Decreases COGS, credit the [I] entry

[I] - confirm parent profit on sub’s beg. inventory
Dr; investment in sub; [beg. inventory - imputed COGS]
(Cr); COGS; [beg. inventory - imputed COGS]

100 % of profit is added to controlling interest ENI.
NOTHING is added to NC.Int in NI

Beginning inventory results from the prior year’s merchandise transfer; profits may be confirmed on the selling affiliate’s books.

Question 14

Ending Inventory, Downstream Unconfirmed Profits

Answer 14

Increases COGS, debit the [I] entry

[I-a] - eliminate sales and purchases
Dr; sales; [sale price on merchandise]
(Cr); COGS; [sale price on merchandise]

[I-b] - eliminate profit from the buyer’s end. inventory
Dr; COGS; [end. inventory - imputed COGS]
(Cr); inventory; [end. inventory - imputed COGS]

100 % of profit is subtracted from controlling interest ENI.
NOTHING is subtracted from NC.Int in NI

beg. inventory + purchases - COGS = end. inventory

Question 15

Beginning Inventory, Upstream Unconfirmed Profits

Answer 15

Decreases COGS, credit the [I] entry

[I] - confirm sub profit on parent’s beg. inventory
Dr; RtE; [beg. inventory - imputed COGS]
(Cr); COGS; [beg. inventory - imputed COGS]

Controlling interest % of profit is added to ENI.
Noncontrolling interest % of profit is added to its interest in NI.

Beginning inventory results from the prior year’s merchandise transfer; profits may be confirmed on the selling affiliate’s books.

Question 16

Ending Inventory, Upstream Unconfirmed Profits

Answer 16

Increases COGS, debit the [I] entry

[I-a] - eliminate sales and purchases
Dr; sales; [sale price on merchandise]
(Cr); COGS; [sale price on merchandise]

[I-b] - eliminate profit from the buyer’s end. inventory
Dr; COGS; [end. inventory - imputed COGS]
(Cr); inventory; [end. inventory - imputed COGS]

Controlling interest % of profit is subtracted from controlling interest ENI.
Noncontrolling interest % of profit is subtracted from its interest in NI.