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



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Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • The remaining $400 unrealized profit on 12/31/2001 is attributable to the minority interest in net assets of Sage.
  • The following working paper elimination would be prepared on 12/31/2002 to reflect the above facts:

Intercompany (Unrealized) Profit in Beginning and Ending Inventories(contd.)

  • (b) Retained Earnings—Sage($8,000 x 0.95)*
  • 7,600
  • 400
  • Intercompany Sales--Sage
  • 150,000
  • 120,000
  • Cost of Goods Sold—Post
  • 26,000
  • Inventories—Post
  • 12,000
  • To eliminate intercompany sales, cost of goods sold, and unrealized intercompany profit in inventories. (Income tax effects are disregarded.)
  • * As indicated in Chapter 7 (Page 29), this elimination is posted to the beginning-of-year retained earnings in the statement of retained earnings section of the working paper for consolidated financial statements.

Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest

  • A general principle is that all the unrealized intercompany profit in the ending inventory of the buyer (i.e., a partially owned or wholly owner subsidiary or a parent), should be eliminated for the consolidated financial statement as long as the seller is either the parent or other wholly owned subsidiaries.

Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • On the other hand, when the seller is a partially owned subsidiary (either to its parent or to other subsidiaries), there is no general agreement regarding whether the unrealized intercompany profit in the ending inventory of the buyer (a parent or other subsidiaries) should be all eliminated.

Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • The argument is :
  • The intercompany sale to the minority stockholder is considered as a sale to outsiders.
  • Therefore the unrealized intercompany profit in the ending inventory attributes to minority stockholder’s interest should be treated as realized.
  • It should not to be eliminated in the consolidated financial statements.

Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • The following table illustrates the types of intercompany sales and the related issues of the unrealized intercompany profit in the ending inventory:

Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • Type
  • Seller
  • Buyer
  • Issue
  • Current Practice
  • A
  • All unrealized intercompany profit in the ending inventory is eliminated
  • B
  • (as in Example 8.4)
  • Partially-owna subsidiary
  • Parent or subsidiary
  • Should all unrealized intercompany profit in the ending inventory of the buyer be eliminated?

Issues in Intercompany Profit in Ending Inventories and Amount of Minority Interest (Contd.)

  • Note to the above table:
  • a.The unrealized intercompany profit is attributable to the seller (the partially-own sub.) and must be considered in the computation of the minority interest in net income of the partially own sub. of the year (see Example 8.4 and Example 8.9).

Intercompany Sales of Plant Assets

  • Intercompany sales of plant assets differ from intercompany sales of merchandise in two ways:
  • 1. Intercompany sales of plant assets between affiliated companies are rare transactions.

Intercompany Sales of Plant Assets (Contd.)

  • 2. Due to the long economic lives of plant assets, it requires many accounting periods before the intercompany gains (losses) on sales of these assets are realized in transactions with outsiders.

Intercompany Gain on Sale of Land

  • Example 8.5:
  • Assume that on 12/31/2001, Post (the parent company) sold to Sage (the partially owned subsidiary) a parcel of land costing $125,000 for $175,000. The two companies would record the following entries:

Intercompany Gain on Sale of Land (Contd.) Example 8.5: (Contd.)

  • Post Corporation Journal Entry
  • Cash
  • 175,000
  • Land
  • 175,000
  • Land
  • 125,000
  • Cash
  • 175,000
  • Intercompany
  • Gain on Sale
  • of Land
  • 50,000
  • To record acquisition of land from Post Corporation.
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