Chapter 7: Intercompany transfer of services and LT assets Flashcards
Fully adjusted equity entry on parent’s books to defer gain
Dr Income from Sub
CR investment in sub
reversed when asset sold to outside party
Downstream sale or wholly owned upstream sale = 100% of profit
Partially owned upstream sale = percentage of profit
Inter-company transfer of non-current assets
If asset is transferred at something other than book value
- parent must defer any unrealized gain or loss until outside is sold to an unrelated party/parties
- consolidated entity must eliminated gain or loss
- asset must be reported on consolidated statement at original cost as long as held within the consolidated entity
Inter-company transfer of service profit not realized in period of sale
May have to eliminate revenue and expense until profit is realized
may be over course of multiple periods (if service is something that is realized over the life of something)
Inter-company transfer of service profit realized in period of sale
Assuming services transferred benefit the current period no elimination entries necessary
Downstream sale
Parent selling to a subsidiary
gain or loss accrues to parent entity’s stockholders
Upstream sale
Subsidiary selling to parent
gain or loss accrues to subsidiary entity’s stockholders - parent may be whole or part of that
so if not wholly owned, the gain or loss on upstream sale must be apportioned
Unrealized gain on upstream income
Inter-company gain included in subsidiary net income and shared proportionately by the parent and NCI
THEN percentage deferral of upstream sale removed
Whole gain still eliminated in consolidation, just must be allocated
Income assigned to NCI
NCIs proportionate share of subsidiary’s reported net income realized in transactions with parties external to entity
must also recognized NCI percentage of unrealized inter-company gain, reduces NCI share in net income IF upstream sale (not if downstream)
Equity entry to adjust for unrealized gain
DR income from subsidiary
CR investment in subsidiary
At 100% of gain if: downstream sale, or upstream sale by a wholly owned subsidiary
Proportional percentage of gain if: upstream sale by a partially owned subsidiary
adjusts both unrealized gain and incorrectly stated asset
Adjustment to basic consolidation entry where gross profit was deferred by parent’s equity entry
must decrease both parent share of net income and parent share of book value of investment in subsidiary by amount of deferred gain
Additional consolidation entry to remove unrealized gain and revalue unsold inventory
DR gain on a sale (parent overstatement of gain)
CR Inventory (subsidiary overstatement of asset account)
states assets as correct inter-company price and removes unrealized gain
in later periods if the asset is still held
DR Investment in subsidiary
CR asset
Unrealized gain on downstream sale
Percentage of share of subsidiary’s income calculated before removing whole of unrealized gain
no affect on NCI share of net income or net assets of sub
Consolidation entry if downstream transfer asset is held in years subsequent to transaction
DR investment in subsidiary (corrects artificially low balance)
CR asset (corrects to original price)
must be done every year as long as the affiliate holds the asset
Equity entry when deferred gain is realized
Realized = asset sold to non-affiliated entity
DR investment in subsidiary
CR income from subsidiary
Simply reverses deferral entry
Adjustment to basic consolidation entry when downstream deferred gain is realized
If original transaction was downstream affects only the parent’s share, not CI
Add deferred gain to both:
Income from subsidiary
Investment in subsidiary
Consolidation entry downstream sale gain realized entry to recognize gain
DR Investment in subsidiary
CR gain on sale of asset
no entry or asset because asset is gone as of sale
brings total gain to correct amount based on original price
Difference in consolidation entries for upstream vs downstream sales
Realized gain on inter-company sale = same consolidation entries for upstream and downstream
UNREALIZED gain on inter-company sale: upstream sale must apportion unrealized gain between parent and NCI
Equity entry for deferral of unrealized gain: upstream sale, partial ownership
DR income from sub
CR investments in sub
But only for PROPORTIONAL share of unrealized gain
decrease in investment from subsidiary corrects overstated asset account
decrease in income from subsidiary corrects overstated share of unrealized gain
Adjustments to basic consolidated entry: unrealized gain on upstream sale, partial ownership
Must subtract proportional share of unrealized gain from:
- income from subsidiary
- investment in subsidiary
AND:
- NCI in net income of subsidiary
- NCI in net assets of subsidiary
Consolidation entry to remove unrealized inter-company gain: upstream sale, partial ownership
DR Gain on sale of asset
CR asset
Sale as downstream entry
Consolidation entry if upstream sale asset is still held (partial ownership) in future years
DR investment in subsidiary
DR NCI in Net assets of subsidiary
CR Asset
(invesment and NCI in net assets are both artifically low so must adjust values to correct)
no affect on total income
Consolidation entry to recognize gain on inter-company, upstream sale (partially owned)
DR investment in subsidiary
DR investment in net assets of subsidiary
CR gain on sale of asset
to recognize full amount of deferred inter-company profit
Unrealized inter-company profits on depreciable/ amortized assets
Viewed as being realized gradually over the remaining economic life of the asset as if used by the purchasing affiliate in generating revenue from unaffiliated parties
so a portion of the deferred gain or loss is realized each period
Depreciation on asset purchased from an affiliate
On consolidated books must be as if sale never occurred (still being depreciated based on original cost)
must restate asset, accumulated depreciation and depreciation expense to amounts that would have been on inter-company statements without transfer
Dealing with unrealized gains or losses on consolidation
Must be eliminated
100% against parent if downstream sale or wholly owned
against parent and NCI if upstream and not wholly owned
When is a gain or loss realized
Generally when a sale is made to an unrelated, external party
Income to controlling interest with unrealized gain on downstream transfer
Downstream transfer = doesn’t matter if wholly or partially owned
Subsidiary net income
x parent ownership
= parent share of subsidiary net income
less 100% deferral from unrealized gain
= parent income from sub
+ parent separate income (including gain)
= income to controlling interest
Income to controlling interest with unrealized gain on UPSTREAM tranfser
Upstream transfer = must consider any NCI
Subsidiary’s operating income
+ upstream inter-company gain
= subsidiary report net income
x parent’s ownership percentage
= parent’s share of subsidiary’s reported income
less parents % deferral of upstream unrealized gain
= parent’s income from subsidiary
+ parent’s separate income
= income to controlling interest
Consolidation entry to adjust value on non-current transferred asset
If asset not sold in same period as transfer AND gain realized on sale
DR Gain on sale of asset
CR asset
Consolidation entry to eliminate gain on sale + adjust depreciable asset: 1st year of transfer
Downstream sale
Must:
- remove parent gain
- correct basis basis of asset on subsidiary’s book as if sale had not happened
DR Gain on Sale
DR Asset
CR Accumulated depreciation
Since no additional depreciation has yet be recorded it gets adjusted to balance that was on parent’s books at time of transfer
Parent Equity method entry to adjust for “extra” depreciation from inter-company transfer
With deferred gain
Gain / useful life = additional depreciation
DR investment in subsidiary (amount of additional depreciation)
CR income from subsidiary
removes PART of deferred gain
done every year subsidiary holds asset until the asset is fully depreciated or until asset sold or disposed of
Consolidation entries: depreciable asset, downstream transfer at a gain, subsequent years of ownership
DOWNSTREAM SALE (or upstream, wholly owned)
- increase investment in subsidiary and income from subsidiary by the amount of extra depreciation (= gain/ useful life. aka partial recognized gain)
- adjust accumulated depreciation and depreciation expense to remove extra depreciation
- restate balance sheet accounts so that:
- asset and accumulated depreciation are at values as if still on parent books (against investment in subsidiary for the amount of unrealized gain)
Consolidated net income with partial realization of deferred gain
Deferred gain on downstream/ wholly owned subsidiary
Parent income
+ realized portion of inter-company gain on downstream sale
= parent separate realized income
+ subsidiary net income
= consolidated net income
- income to non-controlling interest
= income to controlling interest
Consolidation entries for inter-company transferred asset after fully depreciation (and gain fully realized)
DR Asset
CR accumulated depreciation
for difference between original and transfer cost
How consolidation entries for depreciable asset transferred (downstream) at a gain change over the years
Same relabeling every year
DR Accumulated Depreciation
CR depreciation expense (amount of extra depreciation)
revaluation entry for asset and accumulated depreciation:
DR Investment in subsidiary: (amount declines as gain written off)
DR Asset (never changes)
CR Accumulated depreciation (declines as gain is written off)
Change in estimated life of asset of asset on transfer
Same as if asset remained on transferor’s books
new remaining useful life used as basis for depreciation by transferee and for consolidated statement
Difference between upstream sale and downstream sale
If there is a non-controlling interest then, with a downstream sale, the unrealized profit and all subsequent realizations must be split proportionately between parent and NCI
Fully adjusted equity method deferred gain (upstream sale, not wholly owned)
DR income from subsidiary
CR investment in subsidiary
but only for PROPORTION of gain
Basic consolidation entry adjusted for gain on upstream sale in year of sale
DR Common stock
DR Retained earnings
DR income from sub
DR NCI in net income from sub
CR Dividends declared
CR investment in sub
CR NCI in net assets of sub
(all parent and NCI entries are decreased by proportional amount of deferred gain)
Consolidation entry to eliminate unrealized gain: year of sale, upstream sale with NCI
Remove gain on sale and adjust asset back to transferror’s value (asset and accumulated depreciation)
DR gain on sale (remove all)
DR asset (return to historical cost)
CR Accumulated depreciation (replace transferor’s value)
No different for upstream or downstream until gain is realized
NCI in net income calculated from realized only, not including gain
Equity method entries to reverse deferred gain: upstream sale, depreciated asset with NCI
Each year adjust to recognize ownership percentage of (deferred gain / useful life)
DR investment in subsidiary
CR income from subsidiary
Basic consolidation entry: subsequent years after upstream sale of depreciable asset, with NCI
Adjust:
income from subsidiary and investment in subsidiary, up by proportional amount of parent’s recognized gain
NCI in net income from sub and NCI in net assets of sub, up by proportional amount of NCI’s recognized gain
Upstream sale: subsequent years, depreciation expense adjustment entry
DR Accumulated depreciation
CR depreciation expense
by difference between what depreciation should be without transfer and how it was recorded
Consolidation entries to adjust asset from upstream transfers (with depreciation and NCI)
DR investment in sub (proportional amount of deferred outstanding gain)
DR NCI in NA of sub (proportional amount of deferred outstanding gain)
DR asset (to historical cost)
CR accumulated depreciation (to bring to amount would be without transfer)
Calculating NCI in net assets of subsidiary in subsequent years from deferred gain
Book value of sub: common stock + retained earnings = total
Less: unrealized inter-company gain (total)
+ gain realized in subsequent years
= realized book value of subsidiary
x NCI share
= NCI in net assets of subsidiary
If the transfer occurs at the beginning or middle of a period vs at the end
1st year consolidation entries will include adjustment to make depreciation expense/ accumulated depreciation what it would have been had transfer ot occured
Inter-company transfers of amortizable assets
Same consolidation principle, just without use of accumulated deprecation account (so balance of asset account changes instead)
