FAR-F4-M6-Intercompany Transactions Flashcards
What is the general rule for intercompany transactions when consolidating?
When consolidating, 100% of the intercompany transactions between the subsidiary and parent company must be eliminated, even when the parent owns less than 100% of the subsidiary. On the consolidated balance sheet, the parent and subsidiary assets and liabilities are combined into a single statement, however intercompany transactions must be eliminated on the parent’s consolidated balance sheet, not the subsidiary’s.
On the subsidiaries own balance sheet, any payables or receivables resulting from a transaction with the parent should be reflected.
It is common for affiliated companies to sell inventory / merchandise to one another. How is this intercompany transaction treated and what is the general JE to record the reversal?
The total amount of the intercompany sale and COGS (and therefore profit as well) should be eliminated prior to preparing consolidated financial statements.
The passkey is: When inventory has been sold intercompany and the CPA exam requires you to correct the accounts, remember to reverse the original intercompany transaction (the original sale and COGS internally) AND:
- If the inventory was sold to outsiders, then correct COGS
- If the inventory is still on hand, then correct Ending Inventory
1 and 2 combined means that intercompany profit is eliminated from ending inventory and COGS of the purchasing affiliate.
An example of elimination entry would be:
Dr. Intercompany Revenue $800,000
Cr. Intercompany COGS ($640,000)
Cr. COGS - Purchasing Entity ($120,000)
Cr. Inventory - Purchasing Entity ($40,000)
Why are intercompany transactions required to be eliminated?
Intercompany transactions must be eliminated because they lack the criteria of being arms length.
What are some examples of simple income statement eliminations?
Interest expense
Interest income
Gains on sale
Depreciation expense
Intercompany fixed assets
Sales and COGS - Intercompany inventory transactions
If ABC sold to Walker at 25% above its cost and the intercompany sales was $800,000, what is intercompany profit?
Cost * 1.25 = $800,000, therefore cost = $800,000 / 1.25 = $640,000. Therefore intercompany profit is $$800,000 - $640,000 = $160,000
If walker had $200,000 of the inventory purchased from ABC (total sales of $800,000), in its ending inventory, how much of the intercompany profit ($160,000) should be eliminated from Walkers ending inventory and COGS?
$200,000 / $800,000 = 25% of inventory is still on hand, held in ending inventory. Therefore 25% of the intercompany profit will be removed Walkers ending inventory. And 100% - 25% = 75% of intercompany profit will be removed from Walker’s COGS.
What is the general treatment for an intercompany sale of fixed assets?
Basically, the effects of the intercompany sale should be eliminated and depreciation should continue as if the sale never occured.
What is the general treatment for an intercompany sale of fixed assets?
Basically, the effects of the intercompany sale should be eliminated and depreciation should continue as if the sale never occurred.
Is the following statement true or false? When members of a consolidated group have intercompany bond holdings, the bonds are eliminated in consolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings.
If a premium was paid on reacquisition (to retire the bonds), this would be reflected as a decrease to retained earnings (because a premium was paid, meaning more was paid then what the bonds are worth).
True. When members of a consolidated group have intercompany bond holdings, the bonds are eliminated in consolidation and the difference (gain or loss) between the discounted issue price and the premium on reacquisition would be included in retained earnings.
If a premium was paid on reacquisition (to retire the bonds), this would be reflected as a decrease to retained earnings (because a premium was paid, meaning more was paid then what the bonds are worth).
If one member of the consolidated group acquires an affiliates debt from an outsider, is the debt considered retired or not retired?
If one member of the consolidated group acquires an affiliates debt from an outsider, the debt is considered to be retired and a gain or loss is calculated as the difference between the amount paid and the book value of the debt.
