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© Pearson Education, Inc. publishing as Prentice Hall6-1 Chapter 6: Intercompany Profit Transactions – Plant Assets by Jeanne M. David, Ph.D., Univ. of.

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Presentation on theme: "© Pearson Education, Inc. publishing as Prentice Hall6-1 Chapter 6: Intercompany Profit Transactions – Plant Assets by Jeanne M. David, Ph.D., Univ. of."— Presentation transcript:

1 © Pearson Education, Inc. publishing as Prentice Hall6-1 Chapter 6: Intercompany Profit Transactions – Plant Assets by Jeanne M. David, Ph.D., Univ. of Detroit Mercy to accompany Advanced Accounting, 10 th edition by Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

2 © Pearson Education, Inc. publishing as Prentice Hall6-2 Intercompany Profits – Plant Assets: Objectives 1.Assess the impact of intercompany profit on transfers of plant assets in preparing consolidations working papers. 2.Defer unrealized profits on asset transfers by either the parent or subsidiary. 3.Recognize realized, previously deferred profits on asset transfers by the parent or subsidiary. 4.Adjust the calculation of noncontrolling interest amounts in the presence of intercompany profits on asset transfers.

3 © Pearson Education, Inc. publishing as Prentice Hall6-3 1: Transfers of Plant Assets Intercompany Profit Transactions – Plant Assets

4 © Pearson Education, Inc. publishing as Prentice Hall6-4 Intercompany Fixed Asset Sales Intercompany sales of nondepreciable fixed assets: In year of intercompany sale –Defer any gain or loss –Restate fixed asset to cost In years of continued ownership –Adjust investment account to defer gain or loss (adjust noncontrolling interest too, if upstream sale) –Restate fixed asset to cost In year of sale to outside entity –Adjust investment account (and noncontrolling interest if upstream sale) –Recognize the previously deferred gain or loss

5 © Pearson Education, Inc. publishing as Prentice Hall6-5 Intercompany Sale of Land Park owns 90% of Stan, acquired at cost equal to fair value. In 2009, Park sells (downstream) land to Stan and records a $10 gain. In 2013, Stan sells the land to an outside entity at a $15 gain. Stan's separate income was $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

6 © Pearson Education, Inc. publishing as Prentice Hall6-6 2009 Calculations Defer the unrealized gain, with full effect to Park Park's Income from Stan 90%(70) – 10 = $53 Noncontrolling interest share 10%(70) = $7 Elimination entry for 2009 Worksheet Gain on sale of land10 Land10

7 © Pearson Education, Inc. publishing as Prentice Hall6-7 2010 to 2012 Calculations Continue to defer gain, with full effect to Park Park's Income from Stan 90%(80) = $72 Noncontrolling interest share 10%(80) = $8 Elimination entry for Worksheets in 2010 to 2012 Investment in Stan10 Land10

8 © Pearson Education, Inc. publishing as Prentice Hall6-8 2013 Calculations Recognize the previously deferred gain, with full effect to Park Park's Income from Stan 90%(90) + 10 = $91 Noncontrolling interest share 10%(90) = $9 Elimination entry for 2013 Worksheet Investment in Stan10 Gain on sale of land10

9 © Pearson Education, Inc. publishing as Prentice Hall6-9 2: Deferring Unrealized Profits Intercompany Profit Transactions – Plant Assets

10 © Pearson Education, Inc. publishing as Prentice Hall6-10 Unrealized Profits on Fixed Assets Unrealized profit or loss on nondepreciable fixed assets –Defer in year of intercompany sale –Continue deferring by adjusting the investment in subsidiary (and noncontrolling interest if upstream) –Recognize full profit or loss upon resale to outside entity

11 © Pearson Education, Inc. publishing as Prentice Hall6-11 Depreciable Fixed Assets Gains and losses on intercompany sales of depreciable fixed assets –Defer in period of intercompany sale –Recognize gain or loss over remaining life of asset Adjust asset and depreciation down for gains Adjust asset and depreciation up for losses –Recognize any unamortized gain or loss upon sale to outside entity

12 © Pearson Education, Inc. publishing as Prentice Hall6-12 Downstream Example Perry owns 80% of Soper, acquired at cost equal to fair value. On 1/1/09, Perry sells equipment to Soper at a $30 profit. The equipment has a remaining life of 5 years from 1/1/09. Soper disposes of the equipment at book value at the end of 5 years. Soper's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

13 © Pearson Education, Inc. publishing as Prentice Hall6-13 2009 Calculations Defer the unrealized gain and amortize it over 5 years with full effect to Perry 30 gain / 5 years = $6 Perry's Income from Soper 80%(70) – 30 + 6 = $32 Noncontrolling interest share 20%(70) = $14 Elimination entry for 2009 Worksheet Gain on sale of equipment30 Equipment30 Accumulated depreciation6 Depreciation expense6

14 © Pearson Education, Inc. publishing as Prentice Hall6-14 3: Recognizing Realized, Previously Deferred Profits Intercompany Profit Transactions – Plant Assets

15 © Pearson Education, Inc. publishing as Prentice Hall6-15 Previously Deferred Gains/Losses Recognize over the life of the depreciable asset –Downstream sales Adjust investment in subsidiary account –Upstream sales Adjust investment in subsidiary account and noncontrolling interest, proportionately –Intercompany sales at a gain Adjust asset and depreciation down –Intercompany sales at a loss Adjust asset and depreciation up

16 © Pearson Education, Inc. publishing as Prentice Hall6-16 2010 to 2012 Calculations Continue to recognize part of the gain, with full effect to Perry Perry's Income from Soper 80%(80) + 6 = $70 Noncontrolling interest share 20%(80) = $16 Elimination entry for Worksheets in 2010 Investment in Soper24 Accumulated depreciation6 Equipment30 Accumulated depreciation6 Depreciation expense6

17 © Pearson Education, Inc. publishing as Prentice Hall6-17 Entries (cont.) Worksheet entries for 2011 Worksheet entries for 2012 Investment in Soper18 Accumulated depreciation12 Equipment30 Accumulated depreciation6 Depreciation expense6 Investment in Soper12 Accumulated depreciation18 Equipment30 Accumulated depreciation6 Depreciation expense6

18 © Pearson Education, Inc. publishing as Prentice Hall6-18 2013 Calculations Recognize the remaining deferred gain, with full effect to Perry Perry's Income from Soper 80%(90) + 6 = $78 Noncontrolling interest share 20%(90) = $18 Elimination entries for 2013 Worksheet Investment in Soper6 Accumulated depreciation24 Equipment30 Accumulated depreciation6 Depreciation expense6

19 © Pearson Education, Inc. publishing as Prentice Hall6-19 4: Impact on Noncontrolling Interest Intercompany Profit Transactions – Plant Assets

20 © Pearson Education, Inc. publishing as Prentice Hall6-20 Sharing Unrealized Gain or Loss Upstream sales of fixed assets require: –Deferring the gain or loss on the sale –Recognizing a portion of the gain or loss as the asset depreciates –Writing off any unrecognized gain or loss upon the sale of the asset –Sharing the gains and losses between the controlling and noncontrolling interests Upstream sales impact noncontrolling interests!

21 © Pearson Education, Inc. publishing as Prentice Hall6-21 Upstream Example Pail owns 70% of Shovel, acquired at cost equal to fair value. On 1/1/09, Shovel sells equipment to Pail at a $40 profit. The equipment has a remaining life of 5 years from 1/1/09. Pail Uses the equipment for four years, then sells it at a profit at the start of 2013. Shovel's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

22 © Pearson Education, Inc. publishing as Prentice Hall6-22 2009 Calculations Defer the unrealized gain and amortize it over 5 years sharing the gain 40 gain / 5 years = $8 Pail's Income from Shovel 70%(70 – 40 + 8) = $26.6 Noncontrolling interest share 30%(70 – 40 + 8) = $11.4 Elimination entry for 2009 Worksheet Gain on sale of equipment40 Equipment40 Accumulated depreciation8 Depreciation expense8

23 © Pearson Education, Inc. publishing as Prentice Hall6-23 2010 to 2012 Calculations Continue to recognize part of the gain, sharing its effect between the controlling and noncontrolling interests Pail's Income from Shovel 70%(80 + 8) = $61.6 Noncontrolling interest share 30%(80 + 8) = $26.4

24 © Pearson Education, Inc. publishing as Prentice Hall6-24 2010 Worksheet Entries Elimination entry for Worksheets in 2010 Investment in Shovel22.4 Noncontrolling interest9.6 Accumulated depreciation8.0 Equipment40.0 Accumulated depreciation8.0 Depreciation expense8.0

25 © Pearson Education, Inc. publishing as Prentice Hall6-25 2011 Worksheet Entries Worksheet entries for 2011 Investment in Shovel16.8 Noncontrolling interests7.2 Accumulated depreciation16.0 Equipment40 Accumulated depreciation8.0 Depreciation expense8.0

26 © Pearson Education, Inc. publishing as Prentice Hall6-26 2012 Worksheet Entries Worksheet entries for 2012 Investment in Shovel11.2 Noncontrolling interest4.8 Accumulated depreciation24.0 Equipment40.0 Accumulated depreciation8.0 Depreciation expense8.0

27 © Pearson Education, Inc. publishing as Prentice Hall6-27 2013 Calculations Recognize the remaining deferred gain, sharing the impact with controlling and noncontrolling interests Unamortized gain = 1 year at $8 Pail's Income from Shovel 70%(90 + 8) = $68.6 Noncontrolling interest share 30%(90 + 8) = $29.4 Elimination entries for 2013 Worksheet Investment in Shovel5.6 Noncontrolling interests2.4 Accumulated depreciation32.0 Equipment40.0 Accumulated depreciation8.0 Gain on sale of equipment8.0

28 © Pearson Education, Inc. publishing as Prentice Hall6-28 Sale at Other Than Fair Value Intercompany sales of fixed assets at prices other than fair value –Deserve scrutiny by shareholders –Sales above fair value move additional cash to the seller –Sales below fair value transfer valuable goods to the buyer –There is a transfer of wealth between the affiliated companies, and between the controlling and noncontrolling interests

29 © Pearson Education, Inc. publishing as Prentice Hall6-29 Inventory Items Fixed Assets An intercompany sale of inventory which is acquired as a fixed asset –Unrealized profit is removed from cost of sales in year of sale –Profit is recognized over the fixed asset's life Cost of salesXXX EquipmentXXX Accumulated depreciationX Depreciation expenseX

30 © Pearson Education, Inc. publishing as Prentice Hall6-30 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


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