Intercompany Transactions Flashcards
Why do intercompany transactions need to be eliminated?
Because they lack the criteria of being “arm’s length”
What needs to be eliminated in the BS?
- Intercompany payables
- Intercompany receivable
- Intercompany gross profit in ending inventory
- Intercompany gross profit in fixed assets
What needs to be eliminated in the IS?
- Interest expense / interest income (bonds)
- Gain on sale / depreciation expense (intercompany fixed asset sales)
- Sales/ COGS (intercompany inventory transactions)
If a company does not consolidate, how are intercompany transactions handled?
They are not eliminated. There is a separate report in FS and footnote disclosure
What are the four types of transactions that need to be eliminated?
- Intercompany inventory/merchandise transactions
- Intercompany bond transactions
- Intercompany sale of land
- Intercompany profit on sale of depreciable fixed assets
For intercompany inventory/merchandise transactions, what must be eliminated?
- Total amount of intercompany sale and COGS
- Intercompany profit eliminated for ending inventory and COGS of purchasing affiliate
- Intercompany profit eliminated for beginning inventory (for prior year intercompany sales) through adjustment to RE
What is the workpaper elimination JE for intercompany merchandise transactions?
Dr. Intercompany sales
Dr. RE (profit in beginning inventory)
Cr. Intercompany COGS
Cr. COGS (intercompany profit included in COGS of purchasing affiliate)
Cr. Ending inventory (intercompany profit in inventory remaining)
If one member of the consolidated group acquired an affiliate’s debt from an outsider, how is the debt accounted for?
It is considered to be retired and a gain/loss is recognized on the consolidated IS
How is the gain/loss on extinguishment of debt calculated?
The difference between the price paid to acquire the debt and the BV of the debt
What needs to be eliminated (added) for intercompany bond transactions?
- Bonds payable
- Any interest expense, interest income, interest payable, and interest receivable (intercompany)
- Amortization of discount/premium
- Gain/loss on extinguishment of debt
- Affiliate’s “investment”
What is the eliminating JE for intercompany bond transactions?
Dr. B/P
Dr. Premium (Cr. Discount)
Cr. Investment in Gearty bonds
Cr. Gain (Dr. Loss) on extinguishment of bonds
How are intercompany bond transactions accounted for in subsequent years?
The elimination for realized but unrecorded gain/loss on extinguishment of bonds would be adjusted to RE. NCI would be adjusted if the bonds were originally issued by sub
What is eliminated in intercompany sale of land?
- Intercompany gain/loss
What is the elimination JE for intercompany sale of land?
Dr. Intercompany gain on sale of land
Cr. Land
How is the intercompany sale of land accounted for in subsequent years?
RE would be debited and land would be credited to eliminate intercompany profit every year until land is sold to 3rd party
When would you divide intercompany gain between RE and NCI?
When Sub is seller and Parent is purchaser
What is eliminated for intercompany profit on sale of depreciable fixed assets?
- Intercompany gain/loss
- A/D
What is the elimination JEs for intercompany profit on sale of depreciable fixed assets?
Dr. Intercompany gain on sale of machinery
Cr. Machinery
Cr. Accumulated Depreciation
Dr. Accumulated Depreciation (for excess)
Cr. Depreciation expense
What is the elimination JEs for intercompany profit on sale of depreciable fixed assets in subsequent years?
Dr. RE (Original gain - excess depreciation previously recorded)
Cr. Machinery
Cr. Accumulated depreciation (Original acc. depr. difference less excess previously recorded)
Dr. Accumulated depreciation (for excess)
Cr. Depreciation expense
When a company owns less than 50% of C/S of an investee corp (and is reported under the cost or equity method), how are receivables and payables reported?
Reported separately on the BS
If parent sells equipment to sub with three year life left, and sub depreciates it using a three year life, how much should depreciation expense in year 1 be decreased by?
By 33 1/3% of the gain on sale
How do you calculate the unrealized profit to be eliminated from inventory?
Intercompany profit of inventory x % of inventory purchased still on hand
Rule
100% of all intercompany balances among members of the consolidated group are eliminated
In intercompany bond transactions, when would there be an effect on NCI?
When the bonds were originally issued by the sub. A portion of the gain must be allocated to NCI
In intercompany profit of fixed depreciable asset, what is the fixed asset cost based on?
The original cost from the outside world
When members of a consolidated group have intercompany bond holdings and the bonds are eliminated in consolidation, where would the difference (gain or loss) between the discounted issue price and the premium on reacquisition be included?
Retained earnings
