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© Pearson Education, Inc. publishing as Prentice Hall 6-1
Chapter 6: Intercompany Profit Transactions – Plant Assets
by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany
Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn
© Pearson Education, Inc. publishing as Prentice Hall 6-2
Intercompany Profits – Plant Assets: Objectives1. Assess the impact of intercompany profit on
transfers of plant assets in preparing consolidations working papers.
2. Defer unrealized profits on asset transfers by either the parent or subsidiary.
3. Recognize realized, previously deferred profits on asset transfers by the parent or subsidiary.
4. Adjust the calculation of noncontrolling interest amounts in the presence of intercompany profits on asset transfers.
© Pearson Education, Inc. publishing as Prentice Hall 6-3
1: Transfers of Plant Assets1: Transfers of Plant AssetsIntercompany Profit Transactions – Plant Assets
© Pearson Education, Inc. publishing as Prentice Hall 6-4
Intercompany Fixed Asset SalesIntercompany 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
© Pearson Education, Inc. publishing as Prentice Hall 6-5
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.
© Pearson Education, Inc. publishing as Prentice Hall 6-6
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) = $7Elimination entry for 2009 Worksheet
Gain on sale of land 10
Land 10
© Pearson Education, Inc. publishing as Prentice Hall 6-7
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) = $8Elimination entry for Worksheets in 2010 to 2012
Investment in Stan 10
Land 10
© Pearson Education, Inc. publishing as Prentice Hall 6-8
2013 Calculations
Recognize the previously deferred gain, with full effect to Park
• Park's Income from Stan90%(90) + 10 = $91
• Noncontrolling interest share10%(90) = $9
Elimination entry for 2013 Worksheet
Investment in Stan 10
Gain on sale of land 10
© Pearson Education, Inc. publishing as Prentice Hall 6-9
2: Deferring Unrealized Profits2: Deferring Unrealized ProfitsIntercompany Profit Transactions – Plant Assets
© Pearson Education, Inc. publishing as Prentice Hall 6-10
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
© Pearson Education, Inc. publishing as Prentice Hall 6-11
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
© Pearson Education, Inc. publishing as Prentice Hall 6-12
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.
© Pearson Education, Inc. publishing as Prentice Hall 6-13
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) = $14Elimination entry for 2009 Worksheet
Gain on sale of equipment 30 Equipment 30
Accumulated depreciation 6
Depreciation expense 6
© Pearson Education, Inc. publishing as Prentice Hall 6-14
3: Recognizing Realized, Previously 3: Recognizing Realized, Previously Deferred ProfitsDeferred Profits
Intercompany Profit Transactions – Plant Assets
© Pearson Education, Inc. publishing as Prentice Hall 6-15
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
© Pearson Education, Inc. publishing as Prentice Hall 6-16
2010 to 2012 CalculationsContinue 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) = $16Elimination entry for Worksheets in 2010Investment in Soper 24 Accumulated depreciation 6
Equipment 30
Accumulated depreciation 6
Depreciation expense 6
© Pearson Education, Inc. publishing as Prentice Hall 6-17
Entries (cont.)Worksheet entries for 2011
Worksheet entries for 2012
Investment in Soper 18 Accumulated depreciation 12
Equipment 30
Accumulated depreciation 6
Depreciation expense 6
Investment in Soper 12 Accumulated depreciation 18
Equipment 30
Accumulated depreciation 6
Depreciation expense 6
© Pearson Education, Inc. publishing as Prentice Hall 6-18
2013 CalculationsRecognize the remaining deferred gain, with full
effect to Perry• Perry's Income from Soper
80%(90) + 6 = $78• Noncontrolling interest share
20%(90) = $18Elimination entries for 2013 Worksheet
Investment in Soper 6 Accumulated depreciation 24
Equipment 30
Accumulated depreciation 6
Depreciation expense 6
© Pearson Education, Inc. publishing as Prentice Hall 6-19
4: Impact on Noncontrolling Interest4: Impact on Noncontrolling InterestIntercompany Profit Transactions – Plant Assets
© Pearson Education, Inc. publishing as Prentice Hall 6-20
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 interestsUpstream sales impact noncontrolling interests!
© Pearson Education, Inc. publishing as Prentice Hall 6-21
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.
© Pearson Education, Inc. publishing as Prentice Hall 6-22
2009 CalculationsDefer the unrealized gain and amortize it over 5
years sharing the gain40 gain / 5 years = $8
• Pail's Income from Shovel70%(70 – 40 + 8) = $26.6
• Noncontrolling interest share30%(70 – 40 + 8) = $11.4
Elimination entry for 2009 WorksheetGain on sale of equipment 40
Equipment 40
Accumulated depreciation 8
Depreciation expense 8
© Pearson Education, Inc. publishing as Prentice Hall 6-23
2010 to 2012 Calculations
Continue to recognize part of the gain, sharing its effect between the controlling and noncontrolling interests
• Pail's Income from Shovel70%(80 + 8) = $61.6
• Noncontrolling interest share30%(80 + 8) = $26.4
© Pearson Education, Inc. publishing as Prentice Hall 6-24
2010 Worksheet Entries
Elimination entry for Worksheets in 2010
Investment in Shovel 22.4
Noncontrolling interest 9.6
Accumulated depreciation 8.0
Equipment 40.0
Accumulated depreciation 8.0
Depreciation expense 8.0
© Pearson Education, Inc. publishing as Prentice Hall 6-25
2011 Worksheet Entries
Worksheet entries for 2011
Investment in Shovel 16.8
Noncontrolling interests 7.2
Accumulated depreciation 16.0
Equipment 40
Accumulated depreciation 8.0
Depreciation expense 8.0
© Pearson Education, Inc. publishing as Prentice Hall 6-26
2012 Worksheet Entries
Worksheet entries for 2012
Investment in Shovel 11.2
Noncontrolling interest 4.8
Accumulated depreciation 24.0
Equipment 40.0
Accumulated depreciation 8.0
Depreciation expense 8.0
© Pearson Education, Inc. publishing as Prentice Hall 6-27
2013 CalculationsRecognize the remaining deferred gain, sharing the impact
with controlling and noncontrolling interests• Unamortized gain = 1 year at $8• Pail's Income from Shovel
70%(90 + 8) = $68.6• Noncontrolling interest share
30%(90 + 8) = $29.4Elimination entries for 2013 WorksheetInvestment in Shovel 5.6 Noncontrolling interests 2.4
Accumulated depreciation 32.0
Equipment 40.0
Accumulated depreciation 8.0
Gain on sale of equipment 8.0
© Pearson Education, Inc. publishing as Prentice Hall 6-28
Sale at Other Than Fair ValueIntercompany sales of fixed assets at prices other
than fair value– Deserve scrutiny by shareholders– Sales above fair value move additional
cash to the seller– Sales below fair value transfer valuable
goods to the buyer– There is a transfer of wealth between the
affiliated companies, and between the controlling and noncontrolling interests
© Pearson Education, Inc. publishing as Prentice Hall 6-29
Inventory Items Fixed Assets
An intercompany sale of inventory which is acquired as a fixed asset– Unrealized profit is removed from cost of
sales in year of sale– Profit is recognized over the fixed asset's life
Cost of sales XXX
Equipment XXX
Accumulated depreciation X
Depreciation expense X
© Pearson Education, Inc. publishing as Prentice Hall 6-30
Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice HallPublishing as Prentice Hall
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