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CHAPTER Transactions: Merchandise, Plant Assets, and Notes Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 4 4.

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Presentation on theme: "CHAPTER Transactions: Merchandise, Plant Assets, and Notes Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 4 4."— Presentation transcript:

1 CHAPTER Transactions: Merchandise, Plant Assets, and Notes Fundamentals of Advanced Accounting 1 st Edition Fischer, Taylor, and Cheng 4 4

2 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #2 Intercompany Transactions Transactions between parent and sub Must be eliminated –Consolidated statements represent separate companies as if they were one entity Common intercompany transactions –Merchandise for resale –Land –Fixed assets –Notes receivable/payable

3 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #3 Intercompany Sales Effect on Gross Profit Parent sells inventory to Sub: Cost = $1,000 Sell price = $1,200 Sub sells to outside party: Cost = $1,200 Sell price = $1,500 Gross Profit is unaffected. Gross Profit % is distorted unless intercompany transactions are eliminated.

4 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #4 Intercompany Transactions Intercompany receivables/payables must be eliminated! –Represent transfers of funds –Internal loans No profit on intercompany sales can be recognized! –Unless goods are sold to an outside party

5 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #5 Elimination of Intercompany Inventory Sales Discussed in four sections –No intercompany goods in beginning or ending inventory –Intercompany goods in ending inventory –Intercompany goods in both beginning and ending inventory –Intercompany goods in both beginning and ending inventory: Periodic inventory method

6 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #6 No Intercompany Goods – Beginning or Ending Inventory Review worksheet 4-1 P owns 80% of S’ stock. Purchase price = pro rata share of sub’s book value. P uses the equity method.

7 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #7 No Intercompany Goods – Beginning or Ending Inventory (Continued) Sub sells inventory to parent Cost = $80,000 Sell price = $100,000 GP% = 20% Parent sells inventory to third party Cost = $100,000 Sell price = $150,000 Parent owes $25,000 to sub for inventory purchases

8 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #8 No Intercompany Goods – Beginning or Ending Inventory (Continued) CY1Sub Income - Par60,000 Invest. In Sub - Par60,000 (Eliminates current year income and creates date alignment) EL Common Stock - Sub 80,000 Retained Earnings - Sub 56,000 Invest. In Sub - Par136,000 (Eliminates investment account against 80% of equity) IS Sales 100,000 Cost of goods sold**100,000 (Eliminates intercompany merchandise sales) IA Account payable 25,000 Accounts receivable25,000 (Eliminates intercompany unpaid trade balances) **Includes $80,000 C of G S from Sub to Parent and $20,000 C of G S from Parent to outside party.

9 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #9 Intercompany Inventory Remains in Ending Inventory Review worksheet 4-2 Assume same facts as to acquisition. Sub sells inventory to parent –Cost = $80,000 Sell price = $100,000 GP% = 20% Parent sells inventory to third party –Cost = $60,000 Sell price = $90,000 Intercompany inventory of $40,000 in parent’s ending inventory Parent owes $25,000 to sub for inventory purchases

10 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #10 Intercompany Inventory Remains in Ending Inventory (continued) CY1Sub Income - Par60,000 Invest. In Sub - Par60,000 (Eliminates current year income and creates date alignment) EL Common Stock - Sub 80,000 Retained Earnings - Sub 56,000 Invest. In Sub - Par136,000 (Eliminates investment account against 80% of equity) IS Sales 100,000 Cost of goods sold100,000 (Eliminates intercompany merchandise sales) EI Cost of goods sold 8,000 Inventory8,000 (Eliminates intercompany profit in ending inventory) IA Account payable 25,000 Accounts receivable25,000 (Eliminates intercompany unpaid trade balances)

11 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #11 Intercompany Inventory in Beginning and Ending Inventory Parent’s 1/1 inventory includes $40,000 of interco. goods. Sub sold $120,000 of goods to parent. Sub recorded 20% gross profit on interco. sales. Parent owes $60,000 to sub for inventory at 12/31. Parent’s 12/31 inventory includes $30,000 of interco. goods.

12 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #12 Intercompany Inventory Remains in Ending Inventory – Journal Entries CY1Sub Income - Par48,000 Invest. In Sub - Par48,000 (Eliminates current year income and creates date alignment) ELCommon Stock - Sub 80,000 Retained Earnings - Sub 116,000 Invest. In Sub - Par196,000 (Eliminates investment account against 80% of equity) BI Retained Earnings 1/1 - Par 6,400 Retained Earnings 1/1 - Sub 1,600 Invest. In Sub - Par8,000 (Eliminates profit in beginning inventory and reduces current year C of G S) IS Sales 120,000 Cost of goods sold120,000 (Eliminates intercompany merchandise sales)

13 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #13 Intercompany Inventory Remains in Ending Inventory – Journal Entries (continued) EI Cost of goods sold 6,000 Inventory6,000 (Eliminates intercompany profit in ending inventory) IA Account payable 60,000 Accounts receivable60,000 (Eliminates intercompany unpaid trade balances) Review worksheet 4-3

14 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #14 Eliminations for Periodic Inventories Review worksheet 4-4 Beginning inventory balances appear in the trial balance Purchases account appears in trial balance Entry BI credits beginning inventory balance Entry IS credits the purchases account Ending inventory balances appear as: –A debit to inventory –A credit to cost of goods sold

15 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #15 Intercompany Sales of Plant Assets Any plant asset can be sold between parent and sub Sale of assets can result in gains/losses Buyer records asset at purchase price (includes gain/loss) In consolidation, sale of plant assets are considered internal transfers Depreciable vs. non-depreciable asset transfer –Non-depreciable: defer gain until sold to outside party –Depreciable: amortize gain/loss over useful life Adjust depreciation of transferred asset in consolidation to reflect original cost

16 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #16 Sale of Non-Depreciable Asset Elimination entry “LA” –Eliminates the interco. gain in year of sale –Eliminates the interco. gain from retained earnings in years subsequent to sale –Reclassifies gain from retained earnings to current year gain/loss Example Sub (80% owned) sells land to Parent Sale price: $30,000 Cost: $20,000 $10,000 gain is deferred

17 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #17 Example: Sub (80%) Sells Land to Parent Year of sale:LAGain on land sale10,000 Land10,000 Gain is deferred until land is sold to outside party! Later years:LARE - Sub2,000 RE - Parent8,000 Land10,000 Year of sale to third party: LARE - Sub2,000 RE – Parent8,000 Gain on land sale10,000

18 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #18 Sale of Depreciable Asset Elimination entries “F” –F1: Year of sale: Eliminates the interco. gain Years subsequent to sale: –Eliminates the interco. gain from retained earnings –Corrects accumulated depreciation –F2: Adjusts depreciation back to calculation based on historical cost

19 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #19 Sale of Depreciable Asset (Example) Example Parent sells machine to Sub Sale price: $30,000 Historical cost: $32,000 Accumulated depreciation: $12,000 $10,000 gain based on $20,000 net book value Sub assumes 5 year remaining life

20 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #20 Sale of Depreciable Asset – Elimination Entries Year of sale: F1Gain on sale of machine10,000 Machine10,000 (Defer gain on sale and return asset to cost) F2Accum. Depreciation2,000 Depreciation Expense2,000 (Reduce to depreciation based on historical cost)

21 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #21 Sale of Depreciable Asset – Elimination Entries (continued) Year after sale: F1Retained earnings8,000 Accum. Depreciation2,000 Machine10,000 (Defer gain on sale and return asset to cost) F2Accum. Depreciation2,000 Depreciation Expense2,000 (Reduce to depreciation based on historical cost)

22 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #22 Fixed Asset Worksheets WS 4-5 (year of sale) F1 removes $10,000 profit from machinery; defers $10,000 gain F2 adjusts depreciation and realizes $2,000 gain IDS takes away $10,000 from P [seller], gives back $2,000 WS 4-6 (end of second period after sale) F1 removes profit from machinery; corrects last year's depreciation and defers $8,000 profit as of 1/1/X2 F2 adjusts depreciation and realizes $2,000 gain IDS just gives back $2,000 currently realized gain to P

23 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #23 Intercompany Debt Common for parent to lend funds to sub Parent charges sub interest Entry LN: –LN1 Eliminates intercompany debt Eliminates accrued interest –LN2 Eliminates intercompany interest revenue/expense

24 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #24 Intercompany Debt - Example 7/1 Sub borrows 10,000 from Parent Maturity: 1 year Interest rate: 8% Interest due at maturity Interest accrued at 12/31: $400

25 Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved. Chapter 4, Slide #25 Intercompany Debt – Elimination Entries LN1 Note payable10,000 Note receivable10,000 Interest payable400 Interest receivable400 (Eliminate interco. debt and accrued interest) LN2 Interest income400 Interest expense400 (Eliminate interco. interest)


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