F4 - M6 - Intercompany Transactions

Question 1

Eliminating Intercompany Transactions

Answer 1

• Eliminate 100% for external reporting, even wit NCI
• It not “arms-length”
• If NOT Consolidating, DO NOT eliminate intercompany transactions

Question 2

Simple Balance Sheet Eliminations

Answer 2

• Eliminate 100% of Intercompany payables and receivables
• Dr. Ap
• Cr. AR
• Dr. Bonds Payable
• Cr. Bonds Investment
• Dr. Accrued Bonds Interest Payable
• Cr. Accrued Bond interest receivable

Question 3

Simple Income Statement Eliminations

Answer 3

• BONDS = Interest expense / interest income
• Intercompany fixed asset sales = Gain on sale / Depreciation expense
• Intercompany inventory transactions = Sales / COGS

Question 4

Intercompany Inventory / Merchandise Transactions

Answer 4

• Often intercompany sold at a profit; sales and COGS should be removed before consolidation.
• Profit needs to be eliminated
• Workpaper Elimination
• Dr. Intercompany Sales
• Dr. Retained Earnings
• Cr. Intercompany COGS
• Cr. COGS (Intercompany profit)
• Cr. Ending Inventory (Intercompany profit)

Question 5

Intercompany Profit in Inventories

Answer 5

• Parent JE’s (sold $1.1 million to sub with COGS of $1 million)
• Dr. AR 1.1
• Cr. Intercompany sales 1.1
• Dr. Intercompany COGS 1
• Cr. Inventory 1
• Sub JE
• Dr. Inventory 1.1
• Cr. AP 1.1
• FIX if when Consolidating

Question 6

Intercompany Bond Transactions

Answer 6

• If affiliates group acquires debt from outside party, it its retired and gain / loss is recognized
• Intercompany Interest; eliminate intercompany interest expense, interest income, interest payable
• Amortization of Discount or Premium; eiliminate
• Subsequent years; extinguishment g/l of bonds in subsequent years be adjusted to retained earnings

Question 7

Intercompany Sale of Land

Answer 7

• Lands needs to be sold to an outside to be a gain / loss; intercompany gains / losses will need to be backed out

Question 8

Intercompany Sale of Fixed Assets

Answer 8

• Back out intercompany gain / loss on fixed assets and RESTORE asset and accumulated depreciation
• Correct the depreciation expense

Question 9

Subsequent Year Adjustments

Answer 9

• Closed to retained earnings
• JE to adjust fixed assets
• Dr. Retained Earnings
• Cr. Machinery
• Cr. Accumulated Depreciation
• JE to adjust Depreciation
• Dr. Accumulated Depreciation
• Cr. Depreciation Expense