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