Advanced accounting 10th by a beams athony ch06

Chapter 6: Intercompany Profit
Transactions – Plant Assets
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th edition
by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

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6-1


Intercompany Profits – Plant
Assets: Objectives
1.
2.
3.
4.

Assess the impact of intercompany profit on transfers of plant assets
in preparing consolidations working papers.
Defer unrealized profits on asset transfers by either the parent or
subsidiary.
Recognize realized, previously deferred profits on asset transfers by
the parent or subsidiary.
Adjust the calculation of noncontrolling interest amounts in the
presence of intercompany profits on asset transfers.

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6-2


Intercompany Profit Transactions – Plant Assets

1: Transfers of Plant Assets

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6-3


Intercompany Fixed Asset Sales
Intercompany sales of nondepreciable fixed assets:
• In year of intercompany sale
•

•

– Defer any gain or loss
– Restate fixed asset to cost
In years of continued ownership
– Adjust investment account to defer gain or
loss (adjust noncontrolling interest too, if
upstream sale)
– Restate fixed asset to cost
In year of sale to outside entity
– Adjust investment account (and
noncontrolling interest if upstream sale)
– Recognize the previously deferred gain or loss

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6-4


Intercompany Sale of Land
•

Park owns 90% of Stan, acquired at cost equal to fair value. In 2009,
Park sells (downstream) land to Stan and records a $10 gain. In 2013,
Stan sells the land to an outside entity at a $15 gain. Stan's separate
income was $70 in 2009, $80 per year for 2010 to 2012, and $90 in
2013.

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6-5


2009 Calculations
Defer the unrealized gain, with full effect to Park
• Park's Income from Stan
90%(70) – 10 = $53
• Noncontrolling interest share
10%(70) = $7
Elimination entry for 2009 Worksheet

Gain on sale of land
Land

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10
10
6-6


2010 to 2012 Calculations
Continue to defer gain, with full effect to Park
• Park's Income from Stan
90%(80) = $72
• Noncontrolling interest share
10%(80) = $8
Elimination entry for Worksheets in 2010 to 2012

Investment in Stan
Land
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10
10
6-7


2013 Calculations
Recognize the previously deferred gain, with full effect to Park
• Park's Income from Stan
90%(90) + 10 = $91
• Noncontrolling interest share
10%(90) = $9

Elimination entry for 2013 Worksheet

Investment in Stan
Gain on sale of land
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10
10
6-8


Intercompany Profit Transactions – Plant Assets

2: Deferring Unrealized Profits

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6-9


Unrealized Profits on Fixed Assets
Unrealized profit or loss on nondepreciable fixed assets

– Defer in year of intercompany sale
– Continue deferring by adjusting the
investment in subsidiary (and noncontrolling
interest if upstream)
– Recognize full profit or loss upon resale to
outside entity

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6-10


Depreciable Fixed Assets
Gains and losses on intercompany sales of depreciable fixed assets

– Defer in period of intercompany sale
– Recognize gain or loss over remaining life of
asset
• Adjust asset and depreciation down for
gains
• Adjust asset and depreciation up for losses
– Recognize any unamortized gain or loss upon
sale to outside entity
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6-11


Downstream Example
Perry owns 80% of Soper, acquired at cost equal to fair value. On 1/1/09,
Perry sells equipment to Soper at a $30 profit. The equipment has a
remaining life of 5 years from 1/1/09. Soper disposes of the equipment
at book value at the end of 5 years. Soper's income is $70 in 2009, $80
per year for 2010 to 2012, and $90 in 2013.

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6-12


2009 Calculations
Defer the unrealized gain and amortize it over 5 years with full effect to
Perry
30 gain / 5 years = $6
• Perry's Income from Soper
80%(70) – 30 + 6 = $32
• Noncontrolling interest share
20%(70) = $14
Elimination entry for 2009 Worksheet

Gain on sale of equipment
Equipment
Accumulated depreciation
Depreciation expense
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30
30
6
6
6-13


Intercompany Profit Transactions – Plant Assets

3: Recognizing Realized, Previously
Deferred Profits

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6-14


Previously Deferred Gains/Losses
Recognize over the life of the depreciable asset

– Downstream sales
• Adjust investment in subsidiary account
– Upstream sales
• Adjust investment in subsidiary account and
noncontrolling interest, proportionately
– Intercompany sales at a gain
• Adjust asset and depreciation down
– Intercompany sales at a loss
• Adjust asset and depreciation up
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6-15


2010 to 2012 Calculations
Continue to recognize part of the gain, with full effect to Perry
• Perry's Income from Soper
80%(80) + 6 = $70
• Noncontrolling interest share
20%(80) = $16
Elimination entry for Worksheets in 2010

Investment in Soper
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense
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24
6
6

30
6
6-16


Entries (cont.)
Worksheet entries for 2011

Investment in Soper
Accumulated depreciation
Equipment
Accumulated
Worksheet
entriesdepreciation
for 2012
Depreciation expense

18
12

Investment in Soper
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

12
18

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30
6
6

30
6
6
6-17


2013 Calculations
Recognize the remaining deferred gain, with full effect to Perry
• Perry's Income from Soper
80%(90) + 6 = $78
• Noncontrolling interest share
20%(90) = $18
Elimination entries for 2013 Worksheet

Investment in Soper
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense
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6
24
6

30
6
6-18


Intercompany Profit Transactions – Plant Assets

4: Impact on Noncontrolling Interest

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6-19


Sharing Unrealized Gain or Loss
Upstream sales of fixed assets require:

– Deferring the gain or loss on the sale
– Recognizing a portion of the gain or loss as

the asset depreciates
– Writing off any unrecognized gain or loss
upon the sale of the asset
– Sharing the gains and losses between the
controlling and noncontrolling interests
Upstream sales impact noncontrolling interests!

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6-20


Upstream Example
Pail owns 70% of Shovel, acquired at cost equal to fair value. On 1/1/09,
Shovel sells equipment to Pail at a $40 profit. The equipment has a
remaining life of 5 years from 1/1/09. Pail Uses the equipment for four
years, then sells it at a profit at the start of 2013. Shovel's income is
$70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

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6-21


2009 Calculations
Defer the unrealized gain and amortize it over 5 years sharing the gain
40 gain / 5 years = $8
• Pail's Income from Shovel
70%(70 – 40 + 8) = $26.6
• Noncontrolling interest share

30%(70 – 40 + 8) = $11.4
Elimination entry for 2009 Worksheet

Gain on sale of equipment
Equipment
Accumulated depreciation
Depreciation expense
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40

40

8
8
6-22


2010 to 2012 Calculations
Continue to recognize part of the gain, sharing its effect between the
controlling and noncontrolling interests
• Pail's Income from Shovel
70%(80 + 8) = $61.6
• Noncontrolling interest share
30%(80 + 8) = $26.4

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6-23

2010 Worksheet Entries
Elimination entry for Worksheets in 2010

Investment in Shovel
Noncontrolling interest
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

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22.4
9.6
8.0
40.0
8.0
8.0

6-24


2011 Worksheet Entries
Worksheet entries for 2011

Investment in Shovel
Noncontrolling interests
Accumulated depreciation
Equipment

Accumulated depreciation
Depreciation expense

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16.8
7.2
16.0
40
8.0
8.0

6-25