Intercompany Transactions

Question 1

Why do intercompany transactions need to be eliminated?

Answer 1

Because they lack the criteria of being “arm’s length”

Question 2

What needs to be eliminated in the BS?

Answer 2

• Intercompany payables
• Intercompany receivable
• Intercompany gross profit in ending inventory
• Intercompany gross profit in fixed assets

Question 3

What needs to be eliminated in the IS?

Answer 3

• Interest expense / interest income (bonds)
• Gain on sale / depreciation expense (intercompany fixed asset sales)
• Sales/ COGS (intercompany inventory transactions)

Question 4

If a company does not consolidate, how are intercompany transactions handled?

Answer 4

They are not eliminated. There is a separate report in FS and footnote disclosure

Question 5

What are the four types of transactions that need to be eliminated?

Answer 5

1. Intercompany inventory/merchandise transactions
2. Intercompany bond transactions
3. Intercompany sale of land
4. Intercompany profit on sale of depreciable fixed assets

Question 6

For intercompany inventory/merchandise transactions, what must be eliminated?

Answer 6

• 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

Question 7

What is the workpaper elimination JE for intercompany merchandise transactions?

Answer 7

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)

Question 8

If one member of the consolidated group acquired an affiliate’s debt from an outsider, how is the debt accounted for?

Answer 8

It is considered to be retired and a gain/loss is recognized on the consolidated IS

Question 9

How is the gain/loss on extinguishment of debt calculated?

Answer 9

The difference between the price paid to acquire the debt and the BV of the debt

Question 10

What needs to be eliminated (added) for intercompany bond transactions?

Answer 10

• 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”

Question 11

What is the eliminating JE for intercompany bond transactions?

Answer 11

Dr. B/P
Dr. Premium (Cr. Discount)
Cr. Investment in Gearty bonds
Cr. Gain (Dr. Loss) on extinguishment of bonds

Question 12

How are intercompany bond transactions accounted for in subsequent years?

Answer 12

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

Question 13

What is eliminated in intercompany sale of land?

Answer 13

• Intercompany gain/loss

Question 14

What is the elimination JE for intercompany sale of land?

Answer 14

Dr. Intercompany gain on sale of land

Cr. Land

Question 15

How is the intercompany sale of land accounted for in subsequent years?

Answer 15

RE would be debited and land would be credited to eliminate intercompany profit every year until land is sold to 3rd party

Question 16

When would you divide intercompany gain between RE and NCI?

Answer 16

When Sub is seller and Parent is purchaser

Question 17

What is eliminated for intercompany profit on sale of depreciable fixed assets?

Answer 17

• Intercompany gain/loss

- A/D

Question 18

What is the elimination JEs for intercompany profit on sale of depreciable fixed assets?

Answer 18

Dr. Intercompany gain on sale of machinery
Cr. Machinery
Cr. Accumulated Depreciation

Dr. Accumulated Depreciation (for excess)
Cr. Depreciation expense

Question 19

What is the elimination JEs for intercompany profit on sale of depreciable fixed assets in subsequent years?

Answer 19

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

Question 20

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?

Answer 20

Reported separately on the BS

Question 21

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?

Answer 21

By 33 1/3% of the gain on sale

Question 22

How do you calculate the unrealized profit to be eliminated from inventory?

Answer 22

Intercompany profit of inventory x % of inventory purchased still on hand

Question 23

Rule

Answer 23

100% of all intercompany balances among members of the consolidated group are eliminated

Question 24

In intercompany bond transactions, when would there be an effect on NCI?

Answer 24

When the bonds were originally issued by the sub. A portion of the gain must be allocated to NCI

Question 25

In intercompany profit of fixed depreciable asset, what is the fixed asset cost based on?

Answer 25

The original cost from the outside world

Question 26

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?

Answer 26

Retained earnings