Chapter 8 Consolidated Financial statements: Intercompany Transactions Objectives of the Chapter



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Chapter 8

Objectives of the Chapter

  • To discuss the accounting and working paper eliminations for related party transactions between a parent company and its subsidiaries for:
  •   I. intercompany transactions not involving profit or loss such as loans on promissory notes, leases of property under operating leases and rendering of services;

Objectives of the Chapter (Contd.)

  • II.intercompany transactions involving profit or loss such as intercompany sale of merchandise, plant assets, intangible assets and leases of property (under capital/sales-type leases).

Principle to follow to account for the intercompany transactions for the consolidated financial statements:

  • The consolidated financial statements should include only transactions resulting from the consolidated group’s dealings with outsiders.

Principle to follow to account for the intercompany transactions for the consolidated financial statements: (Contd.)

  • Separate ledger accounts are established for all intercompany assets, liabilities, revenue and expenses.
  • These separate accounts clearly identify the intercompany items that should be eliminated in the preparation of consolidated financial statements.

I. Accounting for Intercompany Transactions Not Involving Profit (Gain) or Loss

  • loans on Notes or Open Accounts
    • The parent company may make loans to its subsidiaries.
    • The interest rate charged by the parent company usually exceeds the parent company’s borrowing rate.

I. Accounting for Intercompany Transactions Not Involving Profit (Gain) or Loss (Contd.)

    • Intercompany ledger accounts are used by the parent and the subsidiary to account for these intercompany transactions in order to differentiate intercompany loans and loans with outsiders.

Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary)

  • Date of Note
  • Term of Note, Months
  • Interest Rates, %
  • Amount
  • Feb.1, 2001
  • 6
  • 10
  • $10,000
  • Apr.1, 2001
  • 6
  • 10
  • 15,000
  • Sept.1, 2001
  • 6
  • 10
  • 21,000
  • Nov.1, 2001
  • 6
  • 10
  • 24,000

Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)

  • Palm Corp. and Starr Company will use the following ledger accounts to record the foregoing transactions (assuming all notes were paid by Starr when due):
  • 2001
  • 2001
  • 02/01
  • 10,000
  • 10,000
  • 08/01
  • 04/01
  • 15,000
  • 15,000
  • 10/01
  • 09/01
  • 21,000
  • 11/01
  • 24,000
  • Bal on 11/01
  • 45,000
  • 2001
  • 2001
  • 08/01
  • 10,000
  • 10,000
  • 02/01
  • 10/01
  • 15,000
  • 15,000
  • 04/01
  • 21,000
  • 09/01
  • 24,000
  • 11/01
  • 45,000
  • Bal on 11/01

Example 8.1: Intercompany Loans from Palm (the parent company) to Starr (the subsidiary) (Contd.)

  • 2001
  • 12/31
  • 1,100
  • 2001
  • 1,100
  • 12/31
  • 2001
  • 500
  • 08/01
  • 750
  • 10/01
  • 1,100
  • 12/31
  • 2,350
  • Bal on 12/31
  • 2001
  • 08/01
  • 500
  • 10/01
  • 750
  • 12/31
  • 1,100
  • Bal on 12/31
  • 2,350
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