Intracompany Transactions

Question 1

Parent Owns 75% of Sub. Sub Pays 5,000 dividend. How much dividend should be eliminated?

Answer 1

100% of dividends paid should be eliminated even though Parent owns 75% of Sub.

Question 2

Parent bought bonds issued by sub on premium, the difference between the carrying amounts in two companies would be treated how?

Answer 2

It would be included as a decrease in retained earnings.

RULE: 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 price and premium on reacquisition would be included in retained earnings.

Question 3

There was a intercompany sale of equipment. in consolidation how gain on sale will be treated.

Answer 3

It will be decreased by 100%/economic life. If economic life left is 3 years it will be 100%/3 = 33 1/3%

Question 4

Parent sold the asset to sub on gain. On Consolidated BS how should the asset be reported?

Answer 4

It should be reported as Sub’s original cost minus the gain by Parent. In other words that would be the Sub’s carrying value.

Question 5

Parent Sold Inventory costing 40,000 to Sub for 56,000. How much COGS should be eliminated.

Answer 5

56,000

Intercompany Sale - Parent
COGS - Parent
COGS - Sub

Question 6

Parent Has COGS 200,000 and Sub has 150,000. Parent Sold Merchandise whose COS was 100,000. How many COGS should be reported on Consolidated Income Statement?

Answer 6

250,000

COGS Parent + COGS 0f Sub - Intercompany COGS
=200,000 + 150,000 - 100,000 = 250,000

Question 7

The gain on intercompany sale of merchandise is 160,000 and 75% inventory is sold. How much intercompany profit need to be eliminated?

Answer 7

40,000

160,000 x .25 = 40,000

Question 8

A very important hint about Intercompany Sale

Answer 8

When intercompany sales take place, Inventory Leaves from one point to another and if is a part of Ending Inventory, it gets counted. So what is the difference? the difference is the value of inventory is inflated as it now has the gross profit in it. So we have to remove the gross profit not Inventory as a whole. Whenever you have question about Inventory, look for the gross margin!!!

Question 9

Sub Bought Inventory from Sub at 140% of cost and Sold it all to outsider. what Inventory should be removed in Consolidation

Answer 9

COGS of Sub. Actually Sales figure should be removed that would be equal to the COGS of the SUB. So we use the Sales of Sub and COGS of Parent, and this way there are no inflated Sales and COGS and both are removed.