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



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Intercompany Gain in later Years (Contd.)

  • Note to the working paper elimination: The sum of the debit amounts for retained earnings and minority interest in net assets of subsidiary is $4,760 less that that in 2002.
  • This is because $4,760 intercompany gain has been realized in 2002 through the depreciation process in 2002.

Intercompany Gain in later Years (Contd.)

  • The sum of the debit amounts for retained earnings and minority interest in net assets represents the unrealized portion of the intercompany gain at the beginning of the year.
  • For each succeeding year, the unrealized position of the intercompany gain decreases (in the amount of $4,760), as indicated in the following summary of the working paper elimination debits for those years:

Intercompany Gain in later Years (Contd.)

  • Year Ended Dec. 31,
  • 2004
  • 2005
  • 2006
  • Debits
  • (d)Retained earnings-
  • Sage
  • $13,566
  • $ 9,044
  • $ 4,522
  • 714
  • 476
  • 238
  • 14,280
  • 19,040
  • 23,800

Intercompany Gain in later Years (Contd.)

  • Similar working paper elimination will be prepared for year 2004,2005 and 2006. The changes are only in the debit accounts as indicated in the above table.

Intercompany Gain in later Years (Contd.)

  • At the end of year 2006, the entire intercompany gain of $23,800 has been realized through Post’s annual depreciation expense. The following working paper elimination is required for the machine until it is sold:
  • Accumulated Depreciation-
  • Post
  • 23,800
  • 23,800
  • To eliminate intercompany gain in machinery and related accumulated depreciation.(Income tax effects are disregarded.)

Intercompany Lease of Property under Capital/Sale-Type Lease

  • Land, building, machinery, equipment and other property may be transferred between affiliate entities in the form of a sales-type lease to the lessor and a capital lease to the lessee.

Intercompany Lease of Property under Capital/Sale-Type Lease (Contd.)

  • Example 8.6 :
    • Assume that Palm leased equipment to Starr (the wholly owned subsidiary) on 1/2/2001 under a sales-type lease requiring Starr to pay Palm $10,000 at beginning of each year starting 1/2/2001 through 2004, with a bargain purchase option of $1,000 payable on 1/2/2005.

Intercompany Lease of Property under Capital/Sale- Type Lease (Contd.) Example 8.6: (Contd.)

    • Palm’s implicit interest rate, which was known to Starr and was less than Starr’s incremental borrowing rate, was 8%.
    • The economic life of the equipment to Starr was 6 years, with no residual value.
    • The cost of the leased equipment was $30,000.
    • There were no initial direct costs under the lease.

Intercompany Lease of Property under Capital/Sale- Type Lease (Contd.) Example 8.6: (Contd.)

  • The present value of the minimum lease payment is computed as follows:
  • Present value of $10,000 each year for
  • four years at 8% ($10,000 x 3.577097)
  • $ 35,711
  • 735
  • Palm Corporation’s net investment in the
  • lease
  • $ 36,506

Intercompany Lease of Property under Capital/Sale- Type Lease (Contd.) Example 8.6: (Contd.)

  • Journal entries of Palm Corporation for Year 2001:
  • 1/2
  • 41,000
  • Intercompany Cost of Goods Sold
  • 30,000
  • 36,506
  • Unearned Intercompany
  • Interest Revenue ($41,000-$36,506)
  • 4,494
  • 30,000
  • To record Sales-type lease with Starr Company at inception and cost of leased equipment.

Intercompany Lease of Property under Capital/Sale- Type Lease (Contd.) Example 8.6: (Contd.)

  • Contd.
  • 1/2
  • Cash
  • 10,000
  • Intercompany Lease Receivable
  • 10,000
  • To record receipt of first payment on intercompany lease.
  • 12/31
  • Unearned Intercompany Interest Revenue [(31,000-$4,494) x 0.08]
  • 2,120
  • 2,120
  • To recognize interest earned for first year of intercompany sales-type lease.
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