chapter transactions: merchandise, plant assets, and notes fundamentals of advanced accounting 1 st...

CHAPTER

Transactions: Merchandise, Plant Assets, and Notes

Fundamentals of Advanced Accounting 1st Edition

Fischer, Taylor, and Cheng

44

Copyright 2008 by Thomson South-Western, a part of The Thomson Corporation. All rights reserved.Chapter 4, Slide #2

Intercompany Transactions

• Transactions between parent and sub• Must be eliminated

– Consolidated statements represent separate companies as if they were one entity

• Common intercompany transactions– Merchandise for resale– Land– Fixed assets– Notes receivable/payable


Intercompany Sales Effect on Gross Profit

• Parent sells inventory to Sub:Cost = $1,000 Sell price = $1,200

• Sub sells to outside party:Cost = $1,200 Sell price = $1,500

Includes Interco. Sales

Excludes Interco. Sales

Sales 2,700 1,500Less: Cost of Sales 2,200 1,000Gross Profit 500 500GP % 19% 33%

•Gross Profit is unaffected.

•Gross Profit % is distorted unless intercompany transactions are eliminated.


Intercompany Transactions

• Intercompany receivables/payables must be eliminated!– Represent transfers of funds– Internal loans

• No profit on intercompany sales can be recognized!– Unless goods are sold to an outside party


Elimination of Intercompany Inventory Sales

• Discussed in four sections– No intercompany goods in beginning or

ending inventory– Intercompany goods in ending inventory– Intercompany goods in both beginning and

ending inventory– Intercompany goods in both beginning and

ending inventory: Periodic inventory method


No Intercompany Goods – Beginning or Ending Inventory

Review worksheet 4-1

• P owns 80% of S’ stock.• Purchase price = pro rata share of sub’s book

value.• P uses the equity method.


No Intercompany Goods – Beginning or Ending Inventory (Continued)

Parent SubSales 700,000 500,000Less: Cost of Goods Sold 510,000 350,000Gross Profit 190,000 150,000Other Expenses (90,000) (75,000)Subsidiary Income 60,000Net income 160,000 75,000

•Sub sells inventory to parent•Cost = $80,000 Sell price = $100,000 GP% = 20%

•Parent sells inventory to third party•Cost = $100,000 Sell price = $150,000

•Parent owes $25,000 to sub for inventory purchases


No Intercompany Goods – Beginning or Ending Inventory (Continued)

CY1 Sub Income - Par 60,000Invest. In Sub - Par 60,000

(Eliminates current year income and creates date alignment)

EL Common Stock - Sub 80,000 Retained Earnings - Sub 56,000

Invest. In Sub - Par 136,000(Eliminates investment account against 80% of equity)

IS Sales 100,000Cost of goods sold** 100,000

(Eliminates intercompany merchandise sales)

IA Account payable 25,000Accounts receivable 25,000

(Eliminates intercompany unpaid trade balances)**Includes $80,000 C of G S from Sub to Parent and $20,000 C of G S from Parent

to outside party.


Intercompany Inventory Remains in Ending Inventory

Review worksheet 4-2• Assume same facts as to acquisition.• Sub sells inventory to parent

– Cost = $80,000 Sell price = $100,000 GP% = 20%

• Parent sells inventory to third party– Cost = $60,000 Sell price = $90,000

• Intercompany inventory of $40,000 in parent’s ending inventory

• Parent owes $25,000 to sub for inventory purchases


Intercompany Inventory Remains in Ending Inventory (continued)



EL Common Stock - Sub 80,000 Retained Earnings - Sub 56,000


IS Sales 100,000Cost of goods sold 100,000


EI Cost of goods sold 8,000Inventory 8,000

(Eliminates intercompany profit in ending inventory)


(Eliminates intercompany unpaid trade balances)


Intercompany Inventory in Beginning and Ending Inventory

Parent SubSales 800,000 600,000Less: Cost of Goods Sold 610,000 440,000Gross Profit 190,000 160,000Other Expenses (120,000) (100,000)Subsidiary Income 48,000Net income 118,000 60,000

•Parent’s 1/1 inventory includes $40,000 of interco. goods.•Sub sold $120,000 of goods to parent.•Sub recorded 20% gross profit on interco. sales.•Parent owes $60,000 to sub for inventory at 12/31.•Parent’s 12/31 inventory includes $30,000 of interco. goods.


Intercompany Inventory Remains in Ending Inventory – Journal Entries



EL Common Stock - Sub 80,000Retained Earnings - Sub 116,000


BI Retained Earnings 1/1 - Par 6,400Retained Earnings 1/1 - Sub 1,600

Invest. In Sub - Par 8,000(Eliminates profit in beginning inventory and reduces current year C of G S)

IS Sales 120,000Cost of goods sold 120,000



Intercompany Inventory Remains in Ending Inventory – Journal Entries (continued)

EI Cost of goods sold 6,000Inventory 6,000

(Eliminates intercompany profit in ending inventory)


(Eliminates intercompany unpaid trade balances)

Review worksheet 4-3


Eliminations for Periodic Inventories

Review worksheet 4-4• Beginning inventory balances appear in the

trial balance• Purchases account appears in trial balance• Entry BI credits beginning inventory balance• Entry IS credits the purchases account• Ending inventory balances appear as:

– A debit to inventory– A credit to cost of goods sold


Intercompany Sales of Plant Assets

• Any plant asset can be sold between parent and sub

• Sale of assets can result in gains/losses• Buyer records asset at purchase price (includes

gain/loss)• In consolidation, sale of plant assets are

considered internal transfers• Depreciable vs. non-depreciable asset transfer

– Non-depreciable: defer gain until sold to outside party– Depreciable: amortize gain/loss over useful life

• Adjust depreciation of transferred asset in consolidation to reflect original cost


Sale of Non-Depreciable Asset

•Elimination entry “LA” – Eliminates the interco. gain in year of sale– Eliminates the interco. gain from retained

earnings in years subsequent to sale– Reclassifies gain from retained earnings to

current year gain/lossExample•Sub (80% owned) sells land to Parent•Sale price: $30,000•Cost: $20,000•$10,000 gain is deferred


Example: Sub (80%) Sells Land to Parent

Year of sale: LA Gain on land sale 10,000Land 10,000

Gain is deferred until land is sold to outside party!

Later years: LA RE - Sub 2,000RE - Parent 8,000

Land 10,000

Year of sale to third party:LA RE - Sub 2,000

RE – Parent 8,000Gain on land sale 10,000


Sale of Depreciable Asset

•Elimination entries “F” – F1:

• Year of sale: Eliminates the interco. gain• Years subsequent to sale:

– Eliminates the interco. gain from retained earnings

– Corrects accumulated depreciation – F2:

• Adjusts depreciation back to calculation based on historical cost


Sale of Depreciable Asset (Example)

Example• Parent sells machine to Sub • Sale price: $30,000• Historical cost: $32,000• Accumulated depreciation: $12,000• $10,000 gain based on $20,000 net

book value• Sub assumes 5 year remaining life


Sale of Depreciable Asset – Elimination Entries

Year of sale:

F1 Gain on sale of machine 10,000Machine 10,000

(Defer gain on sale and return asset to cost)

F2 Accum. Depreciation 2,000 Depreciation Expense 2,000 (Reduce to depreciation based on historical cost)


Sale of Depreciable Asset – Elimination Entries (continued)

Year after sale:

F1 Retained earnings 8,000Accum. Depreciation 2,000

Machine 10,000 (Defer gain on sale and return asset to cost)

F2 Accum. Depreciation 2,000 Depreciation Expense 2,000 (Reduce to depreciation based on historical cost)


Fixed Asset Worksheets

WS 4-5 (year of sale)• F1 removes $10,000 profit from machinery; defers

$10,000 gain• F2 adjusts depreciation and realizes $2,000 gain• IDS takes away $10,000 from P [seller], gives back

$2,000

WS 4-6 (end of second period after sale)• F1 removes profit from machinery; corrects last year's

depreciation and defers $8,000 profit as of 1/1/X2• F2 adjusts depreciation and realizes $2,000 gain• IDS just gives back $2,000 currently realized gain to P


Intercompany Debt

• Common for parent to lend funds to sub• Parent charges sub interest• Entry LN:

– LN1• Eliminates intercompany debt• Eliminates accrued interest

– LN2• Eliminates intercompany interest revenue/expense


Intercompany Debt - Example

• 7/1 Sub borrows 10,000 from Parent• Maturity: 1 year• Interest rate: 8%• Interest due at maturity• Interest accrued at 12/31: $400


Intercompany Debt – Elimination Entries

LN1 Note payable 10,000Note receivable 10,000

Interest payable 400Interest receivable 400

(Eliminate interco. debt and accrued interest)

LN2 Interest income 400 Interest expense 400 (Eliminate interco. interest)

chapter transactions: merchandise, plant assets, and notes fundamentals of advanced accounting 1 st...

Documents

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outside party slide

cost of goods