Intercompany Transactions

Question 1

Eliminated a 100% for external reporting

Answer 1

they lack a certain criteria of being arm’s length

Question 2

B/S 100% elimination

Answer 2

eliminate all intercompany payables and receivables

dr. a/p
cr. a/r

dr. bonds payable (intercompany portion only)
cr. bonds investment (in affiliate)

dr. accrued bonds interest payable
cr. accrued bonds interest receivable

dr. dividends payable (intercompany portion only)
cr. dividends receivable (from affiliate)

eliminate 100% of intercompany gross profit in ending inventory and fixed assets of parents or sub

Question 3

Income statement elimiation 100%

Answer 3

interest expense/ interest income (bonds)
gain on sale/ dep expense (intercompany fixed asset sales)
sales/cogs (intercompany inventory transaction)

Question 4

Do not eliminate intercompany accounts if you do not consolidate

Answer 4

separate report in financial statement

footnote disclosure

Question 5

Intercompany/merchandise transactions

Answer 5

when affiliated companies sell inventory/merchandise to one another often at a profit. eliminate:
1) sale and cogs
2) intercompany profit from ending inventory and cogs of the purchasing affiliate
3) intercompany profit in the beg inventory that was previously recognized by the selling affiliate in the previous year is an adjustment to re
100% even if you don’t own 100%

Question 6

Intercompany merchandise transaction

Answer 6

dr. intercompany sales
dr. retained earnings (profits in beg of inventory)
cr. intercompany cogs
cr. cogs (intercompany profits included in cogs of purchasing affiliate)
cr. ending inventory (intercompany profit in the inventory remaining)

1) reverse original transaction (sales and cogs sold internally)
2) inventory sold to outsiders -> (correct cogs)
3) inventory still on hand -> (correct ending inventory)

Question 7

intercompany merchandise transaction

Answer 7

example on f3-47

1) eliminate original sales and cogs
2) calculate profits on that and allocate that between the purchaser’s inventory and cogs (credit both)
3) reverse total a/r and a/p of purchaser

for step 2 purchaser's point of view:
bb inven (0) + purchases = cogas - ending inv = cost of goods sold.

then you do cogs/purchases gives cogs % * total profits from step 1

Question 8

Intercompany bond transaction

Answer 8

if one member of the consolidated group acquires an affiliate’s debt from an outsider: 1) debt is retired 2) gain or loss is recognized on i/s (price paid to acquire the debt - bv of the debt)

Example on f3-48:
1) issued bonds with a carrying value and face value at a premium 
dr cash
cr bonds payable
cr premium

2) an affiliated acquired that debt before any portion of the premium is amortized (paid off the outsider)
dr. investment in bonds
cr. cash

3) workpaper affiliation entry
dr. bonds payable
dr. premium
cr. investment in bonds
cr. gain on extinguishment of bonds (plug)

also eliminate:

1) int expense, int income, int receivable, int payable
2) eliminate amortized disc or premium or unamortized disc or premium
3) elimination for realized but unrecorded gain/loss on extinguishment of bonds in subsequent years is adjusted to re. non controlling int would be adjusted if bonds originally issued by the sub.

Question 9

Intercompany sale of land

Answer 9

intercompany gain/loss on sale of land is unrealized till the land is sold to an outsider

1) land sold to an affiliate
dr cash
cr land
cr intercompany gain on sale of land

this cash is now the new basis of the land

2) purchasing affiliate:
dr. land
cr. cash

3) once this land is sold to an outsider, this intercompany unrealized gain is eliminated and basis is reverted to original cost.
dr. intercompany gain on sale of land
cr. land

in the years between 2 and 3 until the land is sold to a third party, entry 3 is repeated. there is no need to divide the gain between re and non controlling interest.

Question 10

intercompany profit on sale of depreciable fixed assets

Answer 10

gain or loss from sale of depreciable fixed asset unrealized till asset is sold to third party

once sold eliminate that gain entry and restore asset and adjusted dep to original balance

1) record sale:
dr cash
dr acc dep
cr machinery (orig cost)
cr intercompany gain on sale of machinery

2) record purchase:
dr. machinery
cr. cash
now cost basis of machinery is this cash
3) record dep in purchaser’s books
dr. depreciation exp
cr. acc dep

4) workpaper elimination entry
dr. intercompany gain
cr. macinery (orig cost-new cost)
cr. acc dep (orig )

5) eliminate excess dep:
a) orig nbv/useful years
b) sp/useful yrs

diff

dr. acc dep
cr. dep exp

Question 11

dividends paid by sub

Answer 11

100% eliminated
if parent owns 75%

75% of sub’s dividends will go to parent
and 25% will go to non controlling int but 100% of this is eliminated under intercompany transactions

therefore, consolidated dividends are dividends paid by the parent

Question 12

goods sold

Answer 12

intercompany sales/gp/a/r same calc: with same markup

sum of two ind rev - consolidation rev = intercompany sales

Question 13

Are intercompany tra only for acquisition

Answer 13

yes. others no elimination

Question 14

if company sells stock to its affiliate

Answer 14

no gain recognized- no gain by seling stock to yourself

Question 15

when company owns less 50%

Answer 15

receivable and payables reported separately on the b/s

100%
with disclosure
not part of inv

Question 16

no inventory eb and cogs adjustment if

Answer 16

nothing on hand at year end

Question 17

consolidated b/s inventory

Answer 17

current assets + (intercompany profit * % of inventory purchased still on hand) (which is the unrealized profit and you have to remove this from ei so that affects your inventory)

Question 18

inventory

Answer 18

carrying amount purchased from x in consolidated balance sheet is ending inventory (not after subtracting the profits)

cogs = inventory sold initially

DBT why dont we subtract profits

Question 19

when sub purchases parent’s bond

Answer 19

1) bond is treated as if its retired by the parent so only a gain (sp-bv) is recorded
2) non controlling is only adjusted if the bond was initially issued by the sub and then bought by the parent, portion of gain in that case must be allocated to non controlling interest

Question 20

machine dep

Answer 20

1) shown at original cost

2) acc dep - show as if the sale had not occurred so orig acc dep + dep for the year

Question 21

fixed asset cost

Answer 21

remains the same as fixed asset cost from the outside world so the seller’s original nbv

or buyer’s sp-gain

Question 22

bonds transactions

Answer 22

when members of a consolidated group have intercopmany bond transactions the gain or loss between the two carrying values or between the discounted issue price and the premium on reacquisition is included in re

if the bonds are acquired by the sub at a premium there will be a discount in re because a premium was paid to retire the bonds

Question 23

inventory calc

Answer 23

find total inventory and gp% for intercompany sales and you knwo that that % is not recognized on the intercompany inventory transactions

Question 24

diff in dep expe

Answer 24

diff between now with new owner and new useful life and what the dep expense would have been had the equipment not be sold so either old cost/old useful life or nbv/ new useful life

Question 25

div

Answer 25

intercompany not shown, non controlling int shown

Question 26

% ownership of above 50%

Answer 26

irrelevant