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



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

  • Sage Company Journal Entry
  • 60,000
  • Cash
  • 60,000
  • Cash
  • 60,000
  • Accumulated
  • Depreciation
  • ($4,600 x 3)
  • 13,800
  • Machinery
  • 50,000
  • To record acquisition of machinery from Sage Company.
  • 23,800
  • To record sale of machinery to Post Corp..
  • The two companies would account for the sale on 12/31/2001 as follows:

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

  • The following working paper elimination is required for the consolidated financial statements on 12/31/2001:
  • 23,800
  • Machinery-Post
  • 23,800
  • To eliminate unrealized intercompany gain on sale of machinery.(Income tax effects are disregarded.)

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

  • The elimination results the machine to be reported on the consolidated financial statements at its carrying amount to Sage as follows:
  • $ 60,000
  • Less:Amount of elimination—intercompany gain
  • 23,800
  • Difference– equal to carrying amount
  • $ 36,200

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

  • Note: the elimination of the $23,800 gain should be taken into account in the minority interest in the net income of Sage (the seller) for year 2001. The $23,800 is also included in the Sage’s retained earnings, for consolidation purposes, on 12/31/2001 I (see textbook 376-378).

Intercompany Gain subsequent to Date of Sale of Depreciable Plant Asset

  • The following working paper elimination is required for the consolidated financial statements of 12/31/2002:
  • (d) Retained Earnings—Sage
  • ($23,800 x 0.95)
  • 22,610
  • Minority Interest in Net Assets of
  • Subsidiary ($23,800 x 0.05)
  • 1,190
  • Accumulated Depreciation—Post
  • 4,760
  • Machinery—Post
  • 23,800
  • 4,760
  • To eliminate unrealized intercompany gain in machinery and in related depreciation.(Income tax effects are disregarded.) Gain element in straight-line depreciation computed as $23,800 x 0.2 = $4,760,based on five-year economic life.

Intercompany Gain subsequent to Date of Sale of Depreciable Plant Asset (Contd.)

  • The elimination of the Post’s depreciation expense can also be verified as follows:
  • Post’s annual straight-line depreciation
  • expense [($60,000-$4,000) x 0.2]
  • $ 11,200
  • Less:Straight-line depreciation expense
  • for a five-year economic life, based on
  • Sage’s carrying amount on date of sale
  • [(36,200-$4,000) x 0.20]
  • 6,440
  • $ 4,760

Intercompany Gain in Depreciation and Minority Interest

  • From the consolidation view point, the intercompany gain element of the acquiring affiliate’s annual depreciation expense represents a realization of a portion of the total intercompany gain by the selling affiliate .

Intercompany Gain in Depreciation and Minority Interest (Contd.)

  • Thus the $4,760 credit to Post’s depreciation expense in the 12/31/2001 working paper elimination increases Sage’s net income for consolidated purposes.
  • This increase must be considered in the computation of the minority interest in the subsidiary’s net income for the year ended 12/31/2002.

Intercompany Gain in later Years

  • The following working paper elimination is required for the consolidated financial statements on 12/31/2003:
  • (d) Retained Earnings—Sage
  • [($23,800-$4,760) x 0.95]
  • 18,088
  • Minority Interest in Net Assets of
  • Subsidiary [($23,800-$4,760) x 0.05]
  • 952
  • Accumulated Depreciation—Post
  • ($4,760 x 2)
  • 9,520
  • Machinery—Post
  • 23,800
  • Depreciation Expense-Post
  • 4,760
  • To eliminate unrealized intercompany gain in machinery and in related depreciation.(Income tax effects are disregarded.)
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