Chapter 7: Intercompany transfer of services and LT assets Flashcards

1
Q

Fully adjusted equity entry on parent’s books to defer gain

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Inter-company transfer of non-current assets

A

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
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Inter-company transfer of service profit not realized in period of sale

A

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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Inter-company transfer of service profit realized in period of sale

A

Assuming services transferred benefit the current period no elimination entries necessary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Downstream sale

A

Parent selling to a subsidiary

gain or loss accrues to parent entity’s stockholders

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Upstream sale

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Unrealized gain on upstream income

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Income assigned to NCI

A

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)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Equity entry to adjust for unrealized gain

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Adjustment to basic consolidation entry where gross profit was deferred by parent’s equity entry

A

must decrease both parent share of net income and parent share of book value of investment in subsidiary by amount of deferred gain

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Additional consolidation entry to remove unrealized gain and revalue unsold inventory

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Unrealized gain on downstream sale

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Consolidation entry if downstream transfer asset is held in years subsequent to transaction

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Equity entry when deferred gain is realized

A

Realized = asset sold to non-affiliated entity

DR investment in subsidiary
CR income from subsidiary

Simply reverses deferral entry

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Adjustment to basic consolidation entry when downstream deferred gain is realized

A

If original transaction was downstream affects only the parent’s share, not CI

Add deferred gain to both:
Income from subsidiary
Investment in subsidiary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Consolidation entry downstream sale gain realized entry to recognize gain

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Difference in consolidation entries for upstream vs downstream sales

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Equity entry for deferral of unrealized gain: upstream sale, partial ownership

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Adjustments to basic consolidated entry: unrealized gain on upstream sale, partial ownership

A

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

20
Q

Consolidation entry to remove unrealized inter-company gain: upstream sale, partial ownership

A

DR Gain on sale of asset
CR asset

Sale as downstream entry

21
Q

Consolidation entry if upstream sale asset is still held (partial ownership) in future years

A

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

22
Q

Consolidation entry to recognize gain on inter-company, upstream sale (partially owned)

A

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

23
Q

Unrealized inter-company profits on depreciable/ amortized assets

A

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

24
Q

Depreciation on asset purchased from an affiliate

A

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

25
Q

Dealing with unrealized gains or losses on consolidation

A

Must be eliminated

100% against parent if downstream sale or wholly owned
against parent and NCI if upstream and not wholly owned

26
Q

When is a gain or loss realized

A

Generally when a sale is made to an unrelated, external party

27
Q

Income to controlling interest with unrealized gain on downstream transfer

A

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

28
Q

Income to controlling interest with unrealized gain on UPSTREAM tranfser

A

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

29
Q

Consolidation entry to adjust value on non-current transferred asset

A

If asset not sold in same period as transfer AND gain realized on sale

DR Gain on sale of asset
CR asset

30
Q

Consolidation entry to eliminate gain on sale + adjust depreciable asset: 1st year of transfer

A

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

31
Q

Parent Equity method entry to adjust for “extra” depreciation from inter-company transfer

A

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

32
Q

Consolidation entries: depreciable asset, downstream transfer at a gain, subsequent years of ownership

A

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)

33
Q

Consolidated net income with partial realization of deferred gain

A

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

34
Q

Consolidation entries for inter-company transferred asset after fully depreciation (and gain fully realized)

A

DR Asset
CR accumulated depreciation

for difference between original and transfer cost

35
Q

How consolidation entries for depreciable asset transferred (downstream) at a gain change over the years

A

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)

36
Q

Change in estimated life of asset of asset on transfer

A

Same as if asset remained on transferor’s books

new remaining useful life used as basis for depreciation by transferee and for consolidated statement

37
Q

Difference between upstream sale and downstream sale

A

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

38
Q

Fully adjusted equity method deferred gain (upstream sale, not wholly owned)

A

DR income from subsidiary
CR investment in subsidiary

but only for PROPORTION of gain

39
Q

Basic consolidation entry adjusted for gain on upstream sale in year of sale

A

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)

40
Q

Consolidation entry to eliminate unrealized gain: year of sale, upstream sale with NCI

A

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

41
Q

Equity method entries to reverse deferred gain: upstream sale, depreciated asset with NCI

A

Each year adjust to recognize ownership percentage of (deferred gain / useful life)

DR investment in subsidiary
CR income from subsidiary

42
Q

Basic consolidation entry: subsequent years after upstream sale of depreciable asset, with NCI

A

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

43
Q

Upstream sale: subsequent years, depreciation expense adjustment entry

A

DR Accumulated depreciation
CR depreciation expense

by difference between what depreciation should be without transfer and how it was recorded

44
Q

Consolidation entries to adjust asset from upstream transfers (with depreciation and NCI)

A

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)

45
Q

Calculating NCI in net assets of subsidiary in subsequent years from deferred gain

A

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

46
Q

If the transfer occurs at the beginning or middle of a period vs at the end

A

1st year consolidation entries will include adjustment to make depreciation expense/ accumulated depreciation what it would have been had transfer ot occured

47
Q

Inter-company transfers of amortizable assets

A

Same consolidation principle, just without use of accumulated deprecation account (so balance of asset account changes instead)