1. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-1 Intercorporate Transfers of Services and Noncurrent Assets 6 Electronic Presentation by Douglas Cloud Pepperdine University Baker / Lembke / King

2. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Intercorporate Transfers A parent company and its subsidiaries often engage in a variety of transactions among themselves. For example, manufacturing companies often have subsidiaries that develop raw materials or produce components to be included in the products of affiliated companies. These transactions between related companies are referred to as intercorporate transfers.

3. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The central idea of consolidated financial statements is that they report on the activities of the consolidating affiliates as if the separate affiliates actually constitute a single company. Because single companies are not permitted to reflect internal transactions in their financial statements, consolidated entities also must exclude from their financial statements the effects of transactions that are contained totally within the consolidated entity. Intercorporate Transfers

4. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Building on the basic consolidation procedures presented in earlier chapters, this chapter and the next two deal with the effects of intercorporate transfers. This chapter deals with intercorporate services (e.g., consulting) and sales of fixed assets, while intercorporate sales of inventory and intercorporate debt transfers are discussed in Chapters 7 and 8, respectively. Intercorporate Transfers

5. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. All aspects of intercorporate transfers must be eliminated in preparing consolidated financial statements so that the statements appear as if they were those of a single company. PSAK 4 mentions open account balances, security holdings, sales and purchases, and interest and dividends as examples of the intercompany balances and transactions that must be eliminated. Intercorporate Transfers

6. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. The focus in consolidation is on the single- entity concept rather than on the percentage of ownership. Once the conditions for consolidation are met, a company becomes part of a single economic entity and all transactions with related companies become internal transfers that must be eliminated fully, regardless of the level of ownership held. Intercorporate Transfers

7. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-7 Transactions of Affiliated Companies Parent Company Parent Company Subsidiary A Subsidiary A Subsidiary B Subsidiary B Consolidated Entity

8. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. Profit of loss from selling an item to a related party normally is considered realized at the time of the sale from the selling company’s perspective, but the profit is not considered realized for consolidation purposes until confirmed, usually through resale to an unrelated party. This unconfirmed profit from an intercorporate transfer is referred to as unrealized intercompany profit. Unrealized Profits and Losses

9. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. From a consolidated viewpoint, the sale of an asset wholly within the consolidated entity involves only a change in the location of the asset and does not represent the culmination of the earning process. To culminate the earning process with respect to the consolidated entity, a sale must be made to a party external to the consolidated party. Unrealized Profits and Losses

10. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-10 The key to deciding when to report a transaction in the consolidated financial statements is to visualize the consolidated entity and determine whether a particular transaction occurs totally with the consolidated entity, in which case its effects must be excluded from the consolidated statements, or involves outsiders and thus constitutes a transaction of the consolidated entity. Unrealized Profits and Losses

11. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-11 Asset Transfers Involving Land When intercorporate transfers of noncurrent assets occur, adjustments often are needed in the preparation of consolidated financial statements for as long as the assets are held by the acquiring company. The simplest example of an intercorporate asset transfer is the intercorporate sale of land.

12. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-12 Intercorporate Sales PT Anak Consolidated Entity PT Induk Purchase of Rp10,000,000 T1 T1–Purchase of land from outsider for Rp10,000,000.

13. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-13 Intercorporate Sales PT Anak Consolidated Entity Sale/Purchase of Rp15,000,000 Gain of Rp5,000,000 PT Induk Purchase of Rp10,000,000 T1 T2–Land sale from PT Induk to PT Anak for Rp15,000,000. T2

14. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-14 Intercorporate Sales PT Anak Consolidated Entity Sale/Purchase of Rp15,000,000 Gain of Rp5,000,000 Gain of Rp10,000,000 Sale of Rp25,000,000 PT Induk Purchase of Rp10,000,000 T1 T3–Land sale from PT Anak to outsider for Rp25,000,000. T2T3

15. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-15 PT Induk PT Anak Consolidated Entity Purchase of Rp10,000,000 Sale/Purchase of Rp15,000,000 Sale of Rp25,000,000 Gain of Rp5,000,000 Gain of Rp10,000,000 If all three transactions are completed in the same accounting period, the parent records a gain of Rp5,000,000, the subsidiary Rp10,000,000, and the consolidated entity reports a gain of Rp15,000,000. If all three transactions are completed in the same accounting period, the parent records a gain of Rp5,000,000, the subsidiary Rp10,000,000, and the consolidated entity reports a gain of Rp15,000,000. Intercorporate Sales--Case A

16. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-16 All three transactions are completed in the same accounting period. PT IndukRp 5,000,000 (Rp15,000,000- Rp10,000,000) PT Anak10,000,000 (Rp25,000,000- Rp15,000,000) Consolidated Entity 15,000,000 (Rp25,000,000- Rp10,000,000) Gain The gain reported by each of the entities is considered to be realized because the land is resold to an unrelated party during the same period. Intercorporate Sales--Case A

17. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-17 Only transaction T1 is completed during the current period. PT Induk Rp -0- PT Anak -0- Consolidated Entity-0- No sale has been made by either of the affiliated companies, and no gains are reported or realized. Intercorporate Sales--Case B

18. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-18 Only transactions T1 and T2 are completed during the current period. PT Induk Rp5,000,000 (Rp15,000,000 - Rp10,000,000) PT Anak -0- Consolidated Entity -0- Intercorporate Sales--Case C Gain The gain reported by PT Induk is considered unrealized from a consolidated point of view and is not reported in the consolidated income statement.

19. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-19 Only transaction T3 is completed during the current period. PT Induk Rp -0- PT Anak 10,000,000 (Rp25,000,000 - Rp15,000,000) Consolidated Entity 15,000,000 (Rp25,000,000– Rp10,000,000) Intercorporate Sales--Case D Gain PT Anak recognizes a gain equal to the difference between its selling price of Rp25,000 and cost of Rp15,000, while the consolidated entity reports a gain equal to the difference between the selling price and the parent’s original cost.

20. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-20 PT Anak PT Induk Consolidated Entity January 1, 20X1 Purchased land for Rp20,000,000 Overview of the Profit Elimination Process PT Induk (Entry 1) Jan. 1 Land20,000,000 Cash20,000,000 Record purchase of land. Jan. 1 Land20,000,000 Cash20,000,000 Record purchase of land.

21. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-21 Overview of the Profit Elimination Process PT Induk PT Anak Consolidated Entity July 1, 20X1 Intercorporate transfer of land Rp35,000,000 PT Induk (Entry 2) July 1 Cash35,000,000 Land20,000,000 Gain on Sale of Land15,000,000 Record sale of land to PT Anak. July 1 Cash35,000,000 Land20,000,000 Gain on Sale of Land15,000,000 Record sale of land to PT Anak.

22. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-22 PT Induk PT Anak Consolidated Entity July 1, 20X1 Intercorporate transfer of land Rp35,000,000 PT Anak (Entry 3) July 1 Land35,000,000 Cash35,000,000 Record purchase of land from PT Induk. July 1 Land35,000,000 Cash35,000,000 Record purchase of land from PT Induk. Overview of the Profit Elimination Process

23. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-23 Overview of the Profit Elimination Process Because the land has not been sold to a party outside the consolidated entity, the land must be reported at its original cost (Rp20,000,000) and the gain (Rp15,000,000) must be eliminated. The following entry is required in the consolidated workpaper prepared at the end of 20X1. E(4) Gain on Sale of Land15,000,000 Land15,000,000 Eliminate unrealized gain on the sale of land.

24. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-24 Assignment of Unrealized Profit Elimination When a sale is from a parent to a subsidiary, referred to as a downstream sale, any gain or loss on the transfer accrues to the stockholders of the parent company. When the sale is from a subsidiary to its parent, an upstream sale, any gain or loss accrues to the stockholders of the subsidiary, which is apportioned between the parent company and the noncontrolling shareholders.

25. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-25 Downstream Sale 1.PT Induk purchases 80 percent of the stock of PT Anak on December 31, 20X1, at the stock’s book value of Rp240,000,000. 2.On July 1, 20X1, PT Induk sells land to PT Anak for Rp35,000,000. The land originally cost PT Induk Rp20,000,000. 3.During 20X1, PT Anak reports net income of Rp50,000,000 and declares dividends of Rp30,000,000. 4.PT Induk accounts for its investment in PT Anak using the basic equity method.

26. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-26 Basic Equity Method Downstream Sale (6) Investment in PT Anak Stock40,000,000 Income from Subsidiary40,000,000 Record equity-method income (5) Cash24,000,000 Investment in PT Anak Stock24,000,000 Record dividend from PT Anak. Rp50,000,000 x.80 Rp30,000,000 x.80

27. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-27 PT Induk PT Anak Eliminations Item Debits Credits Consolidated Income from Subsidiary40,000 Dividends Declared(60,000(30,000) Investment in PT Anak256,000 An entry is needed to eliminate the changes in PT Induk’s investment account for the year, the income from PT Anak recognized by PT Induk, and PT Induk’s share of PT Anak’ dividends. Consolidation Workpaper--20X1 (in ‘000) )

28. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-28 Income from Subsidiary40,000 (7) 40,000 Dividends Declared(60,000(30,000) (7) 24,000 Investment in PT Anak256,000 (7) 16,000 Consolidation Workpaper--20X1 (in ‘000) An entry is needed to eliminate the changes in PT Induk’s investment account for the year, the income from PT Anak recognized by PT Induk, and PT Induk’s share of PT Anak’ dividends. ) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

29. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-29 An entry is necessary to assign a share of PT Anak’ income to the noncontrolling stockholders and eliminate their share of PT Anak’ dividends. An entry is necessary to assign a share of PT Anak’ income to the noncontrolling stockholders and eliminate their share of PT Anak’ dividends. Income to Noncontrolling Interest Dividends Declared(60,000)(30,000) (7) 24,000 Noncontrolling Interest Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

30. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-30 Income to Noncontrolling Interest (8) 10,000(10,000) Dividends Declared(60,000)(30,000) (7) 24,000 (8) 6,000(60,000) Noncontrolling Interest (8) 4,000 Consolidation Workpaper--20X1 (in ‘000) An entry is necessary to assign a share of PT Anak’ income to the noncontrolling stockholders and eliminate their share of PT Anak’ dividends. An entry is necessary to assign a share of PT Anak’ income to the noncontrolling stockholders and eliminate their share of PT Anak’ dividends. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

31. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-31 Retained Earnings, Jan. 1300,000100,000 Investment in PT Anak256,000 (7) 16,000 Common Stock-- PT Anak500,000200,000 Noncontrolling Interest (8) 4,000 An entry is required to eliminate the beginning investment balance. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

32. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-32 Retained Earnings, Jan. 1300,000100,000 (9) 100,000300,000 Investment in PT Anak256,000 (7) 16,000 (9) 240,000 Common Stock-- PT Anak500,000200,000 (9) 200,000500,000 Noncontrolling Interest (8) 4,000 (9) 60,00064,000 Consolidation Workpaper--20X1 (in ‘000) An entry is required to eliminate the beginning investment balance. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

33. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-33 Gain on Sale of Land15,000 (10) 15,0000 Land155.00075.000 (10) 15,000215.000 Consolidation Workpaper--20X1 (in ‘000) An entry is needed to eliminate the changes in PT Induk’s investment account for the year, the income from PT Anak recognized by PT Induk, and PT Induk’s share of PT Anak’ dividends. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

34. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-34 Downstream Sales On Subsequent year, not yet sold: E(17) Retained Earnings15,000,000 Land15,000,000 Eliminate unrealized gain on the sale of land If Sold on Subsequent year: E(19) Retained Earnings15,000,000 Gain on Sale of Land15,000,000 Eliminate unrealized gain on the sale of land

35. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-35 Upstream Sales - Basic Equity Method Entries—20X1 (12) Investment in PT Anak Stock52,000,000 Income from Subsidiary52,000,000 Record equity-method income (11) Cash24,000,000 Investment in PT Anak24,000,000 Record dividend from PT Anak Rp65,000,000 x.80 Rp30,000,000 x.80

36. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-36 An entry is needed to eliminate the income from the subsidiary. Income from Subsidiary 52,000 Dividends Declared (60,000)(30,000) Investments in PT Anak Stock268,000 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

37. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-37 An entry is needed to eliminate the income from the subsidiary. Income from Subsidiary 52,000 (13) 52,000 Dividends Declared (60,000)(30,000) (13) 24,000 Investments in PT Anak Stock268,000 (13) 28,000 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

38. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-38 Income to Noncontrolling Interest Dividends Declared (60,000)(30,000) (13) 24,000 Noncontrolling Interest Consolidation Workpaper--20X1 (in ‘000) An entry is required to assign income to the noncontrolling interest. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

39. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-39 An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest (14) 10,000(10,000) Dividends Declared (60,000)(30,000) (13) 24,000 (14) 6,000 Noncontrolling Interest (14) 4,000 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

40. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-40 An entry is needed to eliminate the beginning investment balance. Retained Earnings (1/1)300,000100,000 Investment in PT Anak Stock268,000 (13) 28,000 Common Stock500,000200,000 Noncontrolling Interest (14) 4,000 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

41. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-41 An entry is needed to eliminate the beginning investment balance. Retained Earnings (1/1)300,000100,000 (15) 100,000300,000 Investment in PT Anak Stock268,000 (13) 28,000 (15) 240,000 Common Stock500,000200,000 (15) 200,000 Noncontrolling Interest (14) 4,000 (15) 60,00064,000 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

42. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-42 An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. Consolidation Workpaper--20X1 (in ‘000) Gain on Sale of Land 15,000 Land155,00075,000 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

43. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-43 Gain on Sale of Land15,000 (16) 15,000 Land155,00075,000 (16) 15,000215,000 Consolidation Workpaper--20X1 (in ‘000) An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. An entry is needed to eliminate the unrealized gain on the intercompany sale of the land. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

44. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-44 Consolidated Net Income--20X1 PT Induk’s separate incomeRp155,000,000 Less: Unrealized intercompany profit on downstream land sale -15,000,000 PT Induk’s separate realized incomeRp140,000,000 PT Induk’s share of PT Anak’s income: PT Anak’ net incomeRp50,000,000 PT Induk’s proportionate sharex.80 40,000,000 Consolidated net income, 20X1Rp180,000,000

45. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-45 Upstream Sales On year 1: E(16) Gain on Sale of Land15,000,000 Land15,000,000 Eliminate unrealized gain on the sale of land. On Subsequent year, not yet sold: E(18) Retained Earnings 12,000,000 Non Controlling Interest 3,000,000 Land15,000,000 Eliminate unrealized gain on the sale of land How about if sold in subsequent year?

46. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-46 Transfers Involving Depreciable Assets Unrealized intercompany profits on a depreciable or amortizable asset are viewed as being realized gradually over the remaining economic life of the asset as it is used by the purchasing affiliate in generating revenue from unaffiliated parties. In effect, a portion of the unrealized gain or loss is realized each period as benefits are derived from the asset and its service potential expires. The amount of depreciation recognized on a company’s books each period on an asset purchased from an affiliate is based on the intercorporate transfer price.

47. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-47 Yet, from a consolidated viewpoint, depreciation must be based on the cost of the asset to the consolidated entity, which is the cost of the asset to the related company that originally purchased it from an outsider. Eliminating entries are needed in the consolidation workpaper to restate the asset, associated accumulated depreciation, and depreciation expense to the amounts that would appear in the financial statements if there had been no intercompany transfer. Because the intercompany sale takes place totally within the consolidated entity, the consolidated financial statements must appear as if the intercompany transfer had never occurred. Transfers Involving Depreciable Assets

48. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-48 Downstream Sale – Depreciable Assets PT Induk Consolidated Entity December 31, 20W8 Purchase equipment for Rp9,000,000 PT Anak Equipment Estimated Useful Life: 10 years Dec. 31 Equipment9,000,000 Cash9,000,000 Record purchase of equipment. Dec. 31 Equipment9,000,000 Cash9,000,000 Record purchase of equipment.

49. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-49 Consolidated Entity PT Induk PT Anak December 31, 20X1 Intercorporate transfer of equipment Rp7,000,000 PT Anak (Entry 20) Dec. 31 Equipment7,000,000 Cash7,000,000 Record purchase of equipment. Dec. 31 Equipment7,000,000 Cash7,000,000 Record purchase of equipment. Downstream Sale PT Induk (Entry 21) Dec. 31 Depreciation Expense900,000 Accumulated Depreciation 900,000 Record 20X1 depreciation expense on equipment sold. Dec. 31 Depreciation Expense900,000 Accumulated Depreciation 900,000 Record 20X1 depreciation expense on equipment sold.

50. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-50 Downstream Sale PT Induk records the sale of the equipment at the end of 20X1 and recognizes the gain on the sale: PT Induk (Entry 22) Dec. 31 Cash7,000,000 Accumulated Depreciation 2,700,000 Equipment9,000,000 Gain on Sale of Equipment700,000 Record sale of equipment. Dec. 31 Cash7,000,000 Accumulated Depreciation 2,700,000 Equipment9,000,000 Gain on Sale of Equipment700,000 Record sale of equipment.

51. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-51 Downstream Sale PT Induk records the normal basic equity-method entries to recognize it share of PT Anak’ income and dividends for 20X1: PT Induk (Entry 24) Dec. 31 Investment in PT Anak Stock40,000,000 Income from Subsidiary40,000,000 Record equity-method income. Dec. 31 Investment in PT Anak Stock40,000,000 Income from Subsidiary40,000,000 Record equity-method income. Rp50,000,000 x.80 PT Induk (Entry 23) Dec. 31 Cash24,000,000 Invest. in PT Anak Stock 24,000,000 Record dividends from PT Anak. Dec. 31 Cash24,000,000 Invest. in PT Anak Stock 24,000,000 Record dividends from PT Anak. Rp30,000,000 x.80

52. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-52 Income from Subsidiary40,000 Dividends Declared(60,000(30,000) Investment in PT Anak256,000 An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. Consolidation Workpaper--20X1 (in ‘000) ) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

53. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-53 Income from Subsidiary40,000 (25) 40,000 Dividends Declared(60,000(30,000) (25) 24,000 Investment in PT Anak256,000 (25) 16,000 Consolidation Workpaper--20X1 (in ‘000) An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. ) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

54. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-54 Income to Non- controlling Interest Dividends Declared(60,000)(30,000) (25) 24,000 Noncontrolling Interest An entry is required to assign income to the noncontrolling interest. An entry is required to assign income to the noncontrolling interest. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

55. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-55 Income to Non- controlling Interest (26) 10,000(10,000) Dividends Declared(60,000)(30,000) (25) 24,000 (26) 6,000(60,000) Noncontrolling Interest (26) 4,000 Consolidation Workpaper--20X1 (in ‘000) An entry is required to assign income to the noncontrolling interest. An entry is required to assign income to the noncontrolling interest. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

56. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-56 Retained Earnings (1/1)300,000100,000 Investment in PT Anak Stock256,000 (25) 16,000 Common Stock500,000200,000 Noncontrolling Interest (26) 4,000 Consolidation Workpaper--20X1 (in ‘000) The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

57. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-57 Retained Earnings (1/1)300,000100,000 (27) 100,000300,000 Investment in PT Anak Stock256,000 (25) 16,000 (27) 240,000 Common Stock500,000200,000 (27) 200,000500,000 Noncontrolling Interest (26) 4,000 (27) 60,00064,000 Consolidation Workpaper--20X1 (in ‘000) The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

58. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-58 The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Gain on Sale of Equipment700 Buildings and Equipment791,000607,000 Accumulated Depreciation447,300320,000 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

59. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-59 Gain on Sale of Equipment700 (28) 700 Buildings and Equipment791,000607,000 (28) 2,0001,400,000 Accumulated Depreciation447,300320,000 (28) 2,700770,000 Consolidation Workpaper--20X1 (in ‘000) The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

60. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-60 In 20X2 The equipment sold has 7 years remaining life.  Depreciation per year Rp7,000,000 / 7 years = Rp1,000,000. PT Anak Food’s separate income: Rp75,000,000 – Rp1,000,000 (depreciation) = Rp74,000,000 Dividends paid Rp 40,000,000 Journal recorded by PT Induk?

61. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-61 Upstream Sales - Basic Equity Method Entries—20X1 (12) Investment in PT Anak Stock59,200,000 Income from Subsidiary59,200,000 Record equity-method income (11) Cash32,000,000 Investment in PT Anak Stock32,000,000 Record dividend from PT Anak. Rp74,000,000 x.80 Rp40,000,000 x.80

62. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-62 An entry is needed to eliminate income form the subsidiary. Consolidation Workpaper--20X2 (in ‘000) Income from Subsidiary 59,200 Dividends Declared (60,000)(40,000) Investments in PT Anak Stock283,200 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

63. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-63 An entry is needed to eliminate income form the subsidiary. Consolidation Workpaper--20X2 (in ‘000) Income from Subsidiary 59,200 (32) 59,200 Dividends Declared (60,000)(40,000) (32) 32,000 Investments in PT Anak Stock283,200 (32) 27,200 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

64. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-64 Consolidation Workpaper--20X2 (in ‘000) An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest Dividends Declared (60,000)(40,000) (32) 32,000 Noncontrolling Interest PT Induk PT Anak Eliminations Item Debits Credits Consolidated

65. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-65 Consolidation Workpaper--20X2 (in ‘000) An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest (33) 14,800(14,800) Dividends Declared (60,000)(40,000) (32) 32,000 (33) 8,000(60,000) Noncontrolling Interest (33) 6,800 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

66. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-66 Consolidation Workpaper--20X2 (in ‘000) Retained Earnings (1/1)420,700120,000 Investment in PT Anak Stock283,200 (32) 27,200 Common Stock500,000200,000 Noncontrolling Interest (33) 6,800 The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

67. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-67 Consolidation Workpaper--20X2 (in ‘000) Retained Earnings (1/1)420,700120,000 (34) 120,000 Investment in PT Anak Stock283,200 (32) 27,200 (34) 256,000 Common Stock500,000200,000 (34) 200,000500,000 Noncontrolling Interest (33) 6,800 (34) 64,00070,800 The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

68. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-68 Consolidation Workpaper--20X2 (in ‘000) The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Retained Earnings (1/1)420,700120,000 (34) 120,000 Buildings and Equipment791,000607,000 Accumulated Depreciation496,400341,000 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

69. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-69 Consolidation Workpaper--20X2 (in ‘000) The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Retained Earnings (1/1)420,700120,000 (34) 120,000 (35) 700420,000 Buildings and Equipment791,000607,000 (35) 2,000 Accumulated Depreciation496,400341,000 (35) 2,700 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

70. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-70 Consolidation Workpaper--20X2 (in ‘000) An entry is required to adjust depreciation for realization of the intercompany gain. Depreciation and Amortization49,10021,000 Accumulated Depreciation496,400341,000 (35) 2,700 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

71. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-71 Consolidation Workpaper--20X2 (in ‘000) An entry is required to adjust depreciation for realization of the intercompany gain. Depreciation and Amortization49,10021,000 (36) 10070,000 Accumulated Depreciation496,400341,000 (36) 100 (35) 2,700840,000 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

72. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-72 Notes Journal 35 and 36 can be united into: Building and Equipment 2,000,000 Retained Earnings 700,000 Depreciation Expense 100,000 Accumulated Depreciation 2,600,000

73. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-73 Consolidated Net Income--20X2 PT Induk’s separate incomeRp160,900,000 Partial realization of intercompany gain on downstream sale of equipment 100,000 PT Induk’s separate realized incomeRp161,000,000 PT Induk’s share of PT Anak’s income: PT Anak’ net incomeRp74,000,000 PT Induk’s proportionate sharex.80 59,200,000 Consolidated net income, 20X2Rp220,200,000

74. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-74 Subsequent years, if not sold Building and Equipment2,000,000 Retained Earnings 600,000 Accumulated Depreciation2,600,000 Accumulated Depreciation 100,000 Depreciation Expense 100,000 OR: Building and Equipment2,000,000 Retained Earnings 600,000 Depreciation Expense 100,000 Accumulated Depreciation2,500,000

75. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-75 Upstream Sale PT Anak sold Equipment for Rp7,000,000 (which previously bought at Rp9,000,000 and had been depreciated for 2 years). PT Anak records the sale of the equipment at the end of 20X1 and recognizes the gain on the sale: PT Anak Dec. 31 Depreciation Expense 900,000 Accumulated Depreciation 900,000 Record sale of equipment. Dec. 31 Depreciation Expense 900,000 Accumulated Depreciation 900,000 Record sale of equipment. PT Anak Dec. 31 Cash7,000,000 Accumulated Depreciation 2,700,000 Equipment9,000,000 Gain on Sale of Equipment700,000 Record sale of equipment. Dec. 31 Cash7,000,000 Accumulated Depreciation 2,700,000 Equipment9,000,000 Gain on Sale of Equipment700,000 Record sale of equipment.

76. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-76 Uostream Sale PT Induk records the purchase of the equipment at the end of 20X1 as follows: PT Induk (Entry 41) Dec. 31 Equipment 7,000,000 Cash 7,000,000 Dec. 31 Equipment 7,000,000 Cash 7,000,000

77. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-77 Upstream Sale PT Induk records the normal basic equity-method entries to recognize it share of PT Anak’ income and dividends for 20X1: PT Induk (Entry 43) Dec. 31 Investment in PT Anak Stock40,560,000 Income from Subsidiary40,560,000 Record equity-method income. Dec. 31 Investment in PT Anak Stock40,560,000 Income from Subsidiary40,560,000 Record equity-method income. Rp50,700 x.80 PT Induk (Entry 42) Dec. 31 Cash24,000,000 Invest. in PT Anak Stock 24,000,000 Record dividends from PT Anak. Dec. 31 Cash24,000,000 Invest. in PT Anak Stock 24,000,000 Record dividends from PT Anak. Rp30,000,000 x.80

78. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-78 Income from Subsidiary40,560 Dividends Declared(60,000(30,000) Investment in PT Anak256,560 An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. Consolidation Workpaper--20X1 (in ‘000) ) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

79. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-79 Income from Subsidiary40,560 (44) 40,560 Dividends Declared(60,000(30,000) (44) 24,000 Investment in PT Anak256,560 (44) 16,560 Consolidation Workpaper--20X1 (in ‘000) An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. An entry is needed to eliminate the income and dividends from PT Anak recognized by PT Induk and the change in the investment account for the year. ) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

80. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-80 Income to Non- controlling Interest Dividends Declared(60,000)(30,000) (44) 24,000 Noncontrolling Interest An entry is required to assign income to the noncontrolling interest. An entry is required to assign income to the noncontrolling interest. Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

81. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-81 Income to Non- controlling Interest (45) 10,000(10,000) Dividends Declared(60,000)(30,000) (44) 24,000 (45) 6,000(60,000) Noncontrolling Interest (45) 4,000 Consolidation Workpaper--20X1 (in ‘000) An entry is required to assign income to the noncontrolling interest. An entry is required to assign income to the noncontrolling interest. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

82. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-82 Retained Earnings (1/1)300,000100,000 Investment in PT Anak Stock256,000 (44) 16,560 Common Stock500,000200,000 Noncontrolling Interest (45) 4,000 Consolidation Workpaper--20X1 (in ‘000) The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

83. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-83 Retained Earnings (1/1)300,000100,000 (46) 100,000300,000 Investment in PT Anak Stock256,560 (44) 16,560 (46) 240,000 Common Stock500,000200,000 (46) 200,000500,000 Noncontrolling Interest (45) 4,000 (46) 60,00064,000 Consolidation Workpaper--20X1 (in ‘000) The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

84. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-84 The unrealized gain on upstream sale of equipment needs eliminating. The unrealized gain on upstream sale of equipment needs eliminating. Gain on Sale of Equipment700 Buildings and Equipment807,000591,000 Accumulated Depreciation450,000317,300 Consolidation Workpaper--20X1 (in ‘000) PT Induk PT Anak Eliminations Item Debits Credits Consolidated

85. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-85 Gain on Sale of Equipment700 (47) 700 Buildings and Equipment807,000591,000 (47) 2,0001,400,000 Accumulated Depreciation450,000317,300 (47) 2,700770,000 Consolidation Workpaper--20X1 (in ‘000) The unrealized gain on upstream sale of equipment needs eliminating. The unrealized gain on upstream sale of equipment needs eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

86. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-86 On 20X2 The equipment sold has 7 years remaining life.  Depreciation per year Rp7,000,000 / 7 years = Rp1,000,000. PT Anak Food’s separate income: Rp75,900,000 Dividends paid Rp 40,000,000 Journal recorded by PT Induk?

87. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-87 Upstream Sales - Basic Equity Method Entries—20X1 Investment in PT Anak Stock60,720,000 Income from Subsidiary60,720,000 Record equity-method income Cash32,000,000 Investment in PT Anak Stock32,000,000 Record dividend from PT Anak. Rp75,900,000 x.80 Rp40,000,000 x.80

88. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-88 An entry is needed to eliminate income form the subsidiary. Consolidation Workpaper--20X2 (in ‘000) Income from Subsidiary 60,720 Dividends Declared (60,000)(40,000) Investments in PT Anak Stock285,280 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

89. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-89 An entry is needed to eliminate income form the subsidiary. Consolidation Workpaper--20X2 (in ‘000) Income from Subsidiary 60,720 (48) 60,720 Dividends Declared (60,000)(40,000) (48) 32,000 Investments in PT Anak Stock285,280 (48) 28,720 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

90. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-90 Consolidation Workpaper--20X2 (in ‘000) An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest Dividends Declared (60,000)(40,000) (48) 32,000 Noncontrolling Interest PT Induk PT Anak Eliminations Item Debits Credits Consolidated

91. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-91 Consolidation Workpaper--20X2 (in ‘000) An entry is required to assign income to the noncontrolling interest. Income to Noncontrolling Interest (49) 15,200(15,200) Dividends Declared (60,000)(40,000) (48) 32,000 (49) 8,000(60,000) Noncontrolling Interest (49) 7,200 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

92. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-92 Consolidation Workpaper--20X2 (in ‘000) Retained Earnings (1/1)420,560120,700 Investment in PT Anak Stock285,280 (48) 28,720 Common Stock500,000200,000 Noncontrolling Interest (49) 7,200 The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

93. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-93 Consolidation Workpaper--20X2 (in ‘000) Retained Earnings (1/1)420,560120,700 (50) 120,700 Investment in PT Anak Stock285,280 (48) 28,720 (50) 256,560 Common Stock500,000200,000 (50) 200,000500,000 Noncontrolling Interest (49) 7,200 (50) 64,14071,340 The stockholders’ equity accounts of PT Anak and the investment account as of the beginning of the year need eliminating. PT Induk PT Anak Eliminations Item Debits Credits Consolidated

94. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-94 Consolidation Workpaper--20X2 (in ‘000) The unrealized gain on downstream sale of equipment needs eliminating. The unrealized gain on downstream sale of equipment needs eliminating. Retained Earnings (1/1)420,560120,700 (50) 120,700 Buildings and Equipment807,000591,000 Accumulated Depreciation501,000336,400 Non Controlling 7,200 Interest 64,140 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

95. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-95 Consolidation Workpaper--20X2 (in ‘000) Retained Earnings (1/1)420,560120,700 (50) 120,700 (51) 560420,000 Buildings and Equipment807,000591,000 (51) 2,0001,400,000 Accumulated Depreciation501,000336,400 (51) 2,700840,000 Non Controlling (51) 140 7,200 Interest 64,140 71,200 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

96. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-96 Consolidation Workpaper--20X2 (in ‘000) An entry is required to adjust depreciation for realization of the intercompany gain. Depreciation and Amortization49,10021,000 Accumulated Depreciation501,000336,400 (51) 2,700 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

97. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-97 Consolidation Workpaper--20X2 (in ‘000) An entry is required to adjust depreciation for realization of the intercompany gain. Depreciation and Amortization49,10021,000 (52) 10070,000 Accumulated Depreciation501,000336,400 (52) 100 (51) 2,700840,000 PT Induk PT Anak Eliminations Item Debits Credits Consolidated

98. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 6-98 Chapter Six THE END