far 3-7 Intercompany Transactions Flashcards

1
Q

A. Eliminate 100% of Intercompany Transactions (even when noncontrolling interest exists)

A
  1. Balance Sheet-Eliminate 100%

2. Income Statement-Eliminate 100%

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2
Q

B. Not Consolidated = Not Eliminated

A

Do not eliminate intercompany accounts if you do NOT consolidate.

  1. Separate report in financial statements
  2. Footnote disclosure
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3
Q

C. Intercompany Inventory/Merchandise Transactions

A

It is common for affiliated companies to sell inventory/merchandise to one another. Often this
inventory/merchandise is sold at a profit. The total amount of this intercompany sale and cost of goods sold should be eliminated prior to preparing consolidated financial statements. In addition, the intercompany profit must be eliminated from the ending inventory and the cost of goods sold of the purchasing affiliate. 100% of the profit should be eliminated even if the parent’s ownership interest is less than 100%. The intercompany profit in beginning inventory that was recognized by the selling affiliate in the previous year must be eliminated by an adjustment (debit) to retained earnings.

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4
Q

Pass key

When Inventory has been sold intercompany and the Examination requires you to correct the accounts, remember to reverse the original intercompany transaction (sale and cost of goods sold, Internally) and:

A

Inventory sold to outsiders –>Correct cost of goods sold

Inventory still on hand –> Correct ending inventory

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5
Q

Intercompany Bond Transactions

A

ONLY EXTRAORDINARY IF “UNUSUAL AND INFREQUENT”

If one member of the consolidated group acquires an affiliate’s debt from an outsider, the debt is considered to be retired and a gain/loss is recognized on the consolidated income statement.

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6
Q

Intercompany Sale of Land

A

The intercompany gain/loss on the sale of land remains unrealized until the land is sold to an outsider. A workpaper elimination entry in the period of sale eliminates the intercompany gain/loss and adjusts the land to its original cost.

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7
Q

Intercompany Profit on Sale of Depreciable Fixed Assets

A

The gain or loss on the intercompany sale of a depreciable asset is unrealized from a consolidated financial statement perspective until the asset is sold to an outsider. A working paper elimination entry in the period of sale eliminates the intercompany gain/loss and
adjusts the asset and accumulated depreciation to their original balance on the date of sale.

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