Chapter Five Intercompany Asset Transactions Sales:20 x $13 CGS:20 x $10 Sales:20 x $11 CGS:20 x $10 Sales:20 x $13 CGS:20 x $11 A sells 20 units to B.

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Chapter Five Intercompany Asset Transactions Sales:20 x $13 CGS:20 x $10 Sales:20 x $11 CGS:20 x $10 Sales:20 x $13 CGS:20 x $11 A sells 20 units to B B sells 20 units to customers Sales:20 x $11CGS:20 x $11 Subtract:

Sales:15 x $13 CGS:15 x $10 Invnt: 5 x $10 Sales:20 x $11 CGS:20 x $10 Sales:15 x $13 CGS:15 x $11 Invnt: 5 x $11 A sells 20 units to B B sells 15 units to customers Sales:20 x $11 CGS: 5 x $11 CGS:15 x $11 Subtract: CGS: 5 x $1Invnt: 5 x $1 Add: Subtract:

ExcessAnnual CostAmortization Equipment$ 70,00010 yrs$ 7,000 Buildings40,00020 yrs2,000 Database 60,00030 yrs 2,000 Total$170,000$11,000 60% Prob 5-32 Reported income - Short$ 40,000 Recog prior yr unreal gain5,000 Defer current yr unreal gain (10,000) Total$ 35,000 Parent’s share (60%)$21,000 Extra amortiz (11,000) Equity earnings of Short$10,000 How Tall calculates equity earnings of Short:

Entry (*G) R/E, 1/1/045,000 CGS5,000 Entry (S) R/E, 1/1/04 (adj)345,000 Common Stock90,000 Add Pd-in cap60,000 Invst in Short297,000 NC int sub 1/1/04198,000 To recognize unrealized gain in beginning inventory.

Entry (A) Equipment56,000 Buildings36,000 Database56,000 Invst in Short148,000 Equipment70,000–2 x 7,000 Buildings40,000–2 x 2,000 Database 60,000–2 x 2,000 60%

Entry (I) Equity earn of Short10,000 Invst in Short10,000 Entry (D) Invst in Short15,000 Dividends Paid15,000

Entry (E) Oper Exp (deprec)9,000 Amortiz Expense2,000 Equipment7,000 Buildings2,000 Database2,000 Entry (P) Liabilities30,000 Receivables30,000

Entry (TI) Revenues140,000 CGS140,000 Entry (G) CGS10,000 Inventory10,000 To eliminate intercompany inventory transfers (as if all of it had been sold). To eliminate unrealized gain in ending inventory.

Noncontrolling Interest Entry NCint in Short Income14,000 NC int Short 1/1/04198,000 Dividends Paid10,000 NC int in Short 12/31202,000 40% x $35,000 Reported income - Short$ 40,000 Recog – prior yr unreal gain5,000 Defer current yr unreal gain (10,000) Total$ 35,000

Upstream Sale vEntry *G adjusts sub’s beginning R/E. vEntry S reflects this adjustment. vEntries G & *G adjusts sub’s current income. vEntries *C, I, and NCI reflect this adjustment. Downstream Sale vEntry *G adjusts parent’s beginning R/E. vEntry S is unaffected. vEntries G & *G adjusts parent’s current income. vEntries *C, I, and NCI are unaffected.

Entry (*G) Upstream R/E, 1/1/045,000 CGS5,000 Downstream 5,000 Beg R/E of subsidiary. Beg R/E of parent. NOTE : For purposes of this class, assume *G is always this entry.

Entry (S) Upsteam R/E, 1/1/04345,000 Common Stock90,000 Add Pd-in cap60,000 Invst in Short297,000 NC int sub 1/1/04198,000 Downstream 350,000 90,000 60, , ,000 When sale is upstream, beg R/E of sub reflects adjustment.

Entry (I) Upstream Equity earn of Short10,000 Invst in Short10,000 Downstream 13,000 Reported income - Short$ 40,000 Recog prior yr unreal gain5,000 Defer current yr unreal gain (10,000) Total$ 35,000 Parent’s share (60%)$21,000 Extra amortiz (11,000) Equity earnings of Short$10,000 $ 40,000. $24,000 (11,000) $13,000 NOTE : There are different approaches to recording unrealized gains on downstream sales. Regardless of approach, consolidated totals will be the same.

Noncontrolling Interest Entry Upstream NCint in Short inc.14,000 NCint Short 1/1/04198,000 Dividends Paid10,000 NCint Short 12/31202,000 Downstream 16, ,000 10, ,000 Reported income - Short$ 40,000 Recog – prior yr unreal gain5,000 Defer current yr unreal gain (10,000) Total$ 35,000 40% x $35,00040% x $40,000

Intercompany Transfer of Depreciable Assets Prob 5-25 Sale of Building IndividualConsolidWorksheet RecordsPerspectAdjustments Asset Transfer Equipment$ 50,000$70,000$ 20,000 Accum Deprec0(40,000)(40,000) Gain on Sale(20,000)020,000 Entry (TA) Equipment20,000 Gain on Sale - Equip 20,000 Accum Deprec40,000 Affects sub income on upstream sale.

IndividualConsolidWorksheet RecordsPerspectAdjustments During 2003 Accum Deprec(10,000)(6,000)4,000 Deprec Exp 10,0006,000 (4,000) Entry (ED) Accum Deprec4,000 Deprec Exp.4,000 Affects sub income on downstream sale.

IndividualConsolidWorksheet RecordsPerspectAdjustments Start of 2004 Equipment$ 50,000$70,000$ 20,000 Accum Deprec(10,000)(46,000)(36,000) R/E effect - seller(20,000)020,000 R/E effect - buyer10,0006,000(4,000) Entry (*TA) Equipment20,000 R/E, 1/1 (seller)20,000 R/E, 1/1 (buyer)4,000 Accum Deprec36,000 One of these will affect Entry ( S ).

IndividualConsolidWorksheet RecordsPerspectAdjustments Start of 2004 Equipment$ 50,000$70,000$ 20,000 Accum Deprec(10,000)(46,000)(36,000) R/E effect - seller(20,000)020,000 R/E effect - buyer10,0006,000(4,000) Start of 2005 Equipment$ 50,000$70,000$ 20,000 Accum Deprec(20,000)(52,000)(32,000) R/E effect - seller(20,000)020,000 R/E effect - buyer20,00012,000(8,000)

IndividualConsolidWorksheet RecordsPerspectAdjustments During 2004 Accum Deprec(10,000)(6,000)4,000 Deprec Exp 10,0006,000 (4,000) Entry (ED) Accum Deprec4,000 Deprec Exp.4,000