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



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

  • In the consolidated financial statement, the land should be reported at the historical cost and the intercompany gain should be eliminated until it is realized (i.e., sold to an outsider by Sage).

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

  • The working paper elimination prepared on 12/31/2001 for the intercompany sale of land with gain transaction is as follows:
  • 50,000
  • 50,000
  • To eliminate unrealized intercompany gain on Sale of land. (Income Tax effects are disregarded.)

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

  • The above working paper elimination is entered in the working paper for consolidated financial statements for the year ended 12/31/2001 as follows:

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

  • Post
  • Corp.
  • Sage Company
  • Eliminations Inc. (Dec.)
  • Consolidated
  • 50,000
  • (c)(50,000)
  • Balance Sheet
  • 175,000
  • (c)(50,000)
  • 125,000

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

  • No journal entries affecting land would be made by Sage in the subsequent years due to land is not depreciable.
  • In the consolidated financial statements of subsequent years, the land should always be reported at the historical cost of $125,000 as long as it is not sold to an outsider.

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

  • Therefore, the following working paper elimination applies to all subsequent years as long as Sage does not sell the land to an outsider:
  • (c) Retained Earnings—Post
  • 50,000
  • Land—Sage
  • 50,000
  • To eliminate unrealized intercompany gain in land. (Income tax effects are disregarded.)

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

  • Note: The foregoing working paper elimination has no effect on the minority interest in net income or net assets of the subsidiary, because the unrealized gain is attributable to the seller that is not a partially own subsidiary.

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

  • Assume that, Sage sold the land to an outsider for $200,000 in the year ended 12/31/2003, the following entry would be recorded by Sage:
  • Cash
  • 200,000
  • Land
  • 175,000
  • 25,000
  • To record sale of land to an outsider.

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

  • A realized gain of $75,000 ($25,000 + $50,000) should be reported on the consolidated financial statement of 2002. Thus, the following working paper elimination is needed:
  • (c) Retained Earnings—Post
  • 50,000
  • Gain on Sale of Land—
  • Post
  • 50,000
  • To recognize $50,000 gain on Post Corporation’s sale of land to Sage Company resulting from sale of land by Sage to an outsiders. (Income tax effects are disregarded.)

Intercompany Gain on Sale of Depreciable Plant Asset

  • Assume that Sage (the partially owned subsidiary) sold machinery to Post (the parent) on 12/31/2001. Details of the sale and depreciation policy of the machinery are as follows:

Intercompany Gain on Sale of Depreciable Plant Asset (Contd.)

  • Selling price of machinery to Post Corp.
  • $ 60,000
  • 50,000
  • Estimated residual value:
  • $ 4,000
  • 4,000
  • Economic life:
  • To Sage Company, Jan.2,1999
  • 10 years
  • To Post Corporation, Dec. 31,2001
  • 5 years
  • Annual depreciation expense (straight-line method):
  • To Sage Company ($46,000 x 0.10)
  • $ 4,600
  • To Post Corporation($56,000 x 0.20)
  • 11,200
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