1. Chapter 6: Intercompany Profit Transactions – Plant Assets
Beams, Advanced Accounting 10e, Ch. 10
3/31/2017
Chapter 6: Intercompany Profit Transactions – Plant Assets
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
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2. Intercompany Profits – Plant Assets: Objectives
Assess the impact of intercompany profit on transfers of plant assets in preparing consolidations working papers.
Defer unrealized profits on asset transfers by either the parent or subsidiary.
Recognize realized, previously deferred profits on asset transfers by the parent or subsidiary.
Adjust the calculation of noncontrolling interest amounts in the presence of intercompany profits on asset transfers.
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3. 1: Transfers of Plant Assets
Intercompany Profit Transactions – Plant Assets
1: Transfers of Plant Assets
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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)
In year of sale to outside entity
Adjust investment account (and noncontrolling interest if upstream sale)
Recognize the previously deferred gain or loss
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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.
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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 land 10
Land
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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 Stan 10
Land
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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 Stan 10
Gain on sale of land
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9. 2: Deferring Unrealized Profits
Intercompany Profit Transactions – Plant Assets
2: Deferring Unrealized Profits
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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
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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
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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.
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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) – = $32
Noncontrolling interest share
20%(70) = $14
Elimination entry for 2009 Worksheet
Gain on sale of equipment 30
Equipment
Accumulated depreciation 6
Depreciation expense
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14. 3: Recognizing Realized, Previously Deferred Profits
Intercompany Profit Transactions – Plant Assets
3: Recognizing Realized, Previously Deferred Profits
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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
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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 Soper 24
Accumulated depreciation 6
Equipment 30
Depreciation expense
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17. Entries (cont.) Worksheet entries for 2011 Worksheet entries for 2012
Investment in Soper 18
Accumulated depreciation 12
Equipment 30 6
Depreciation expense
Investment in Soper 12
Accumulated depreciation 18
Equipment 30 6
Depreciation expense
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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 Soper 6
Accumulated depreciation 24
Equipment 30
Depreciation expense
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19. 4: Impact on Noncontrolling Interest
Intercompany Profit Transactions – Plant Assets
4: Impact on Noncontrolling Interest
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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!
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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 Shovel's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.
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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 – ) = $26.6
Noncontrolling interest share
30%(70 – ) = $11.4
Elimination entry for 2009 Worksheet
Gain on sale of equipment 40
Equipment
Accumulated depreciation 8
Depreciation expense
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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
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24. 2010 Worksheet Entries Elimination entry for Worksheets in 2010
Investment in Shovel
22.4
Noncontrolling interest
9.6
Accumulated depreciation
8.0
Equipment
40.0
Depreciation expense
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25. 2011 Worksheet Entries Worksheet entries for 2011 Investment in Shovel
16.8
Noncontrolling interests
7.2
Accumulated depreciation
16.0
Equipment 40
8.0
Depreciation expense
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26. 2012 Worksheet Entries Worksheet entries for 2012 Investment in Shovel
11.2
Noncontrolling interest
4.8
Accumulated depreciation
24.0
Equipment
40.0
8.0
Depreciation expense
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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 Shovel
5.6
Noncontrolling interests
2.4
Accumulated depreciation
32.0
Equipment
40.0
8.0
Gain on sale of equipment
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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
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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 sales
XXX
Equipment
Accumulated depreciation X
Depreciation expense
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Copyright © 2009 Pearson Education, Inc.   Publishing as Prentice Hall
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