Slide
5-1
CHAPTER
5
Consolidated
Financial
Statements Intercompany Asset
Transactions
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-2
Intercompany Inventory
Transactions

Transactions between the
parent and subsidiary are
viewed as “internal”
transactions of a single
economic entity.
 The effects of those
transactions should be
“eliminated” from the
consolidated financial
statements.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-3
Intercompany Inventory
Transactions
ENTRY TI
On the consolidation worksheet, eliminate ALL
intercompany sales/purchases of inventory.
CONSOLIDATION JOURNAL
Date
Description
Page
Debit
ENTRY TI
Sales
Cost of Goods Sold
##
Credit
$$$
$$$
Purchases component of COGS.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-4
Unrealized Inventory Gains
Year of Transfer
ENTRY G
Despite Entry TI, ending inventory is still overstated by
the amount of gain on the inventory that is still unsold
at year end.
We must eliminate the unrealized gain as follows:
CONSOLIDATION JOURNAL
Date
Description
ENTRY G
Cost of Goods Sold
Inventory
Page
Debit
##
Credit
$$$
$$$
Ending Inventory component of COGS.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-5
Unrealized Inventory Gains
Year Following Year of Transfer
ENTRY *G
If the inventory was sold during the year, the
gain is now in Retained Earnings and must be
moved back to Income.
CONSOLIDATION JOURNAL
Date
Description
ENTRY *G
R/E (Beg. Bal. of seller)
COGS (Beg. Inv. Component)
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-6
Unrealized Inventory Gains
Year Following Year of Transfer
ENTRY *G
If the transfer of inventory is DOWNSTREAM & if the
parent uses the Equity Method, then the following
entry is used to recognize the remaining unrealized
profit left at the end of the previous year.
CONSOLIDATION JOURNAL
Date
Description
ENTRY *G
Equity in Subsidiary Income
COGS (Beg. Inv. Component)
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-7
Inventory Transfers
Example
On April 5, 2001 World Co (parent) buys
1,000 widgets from Sub, Inc. for
$500,000. The widgets originally cost
Sub, Inc. $400,000.
At year-end on December 31, 2001, World
Co. still had 250 of the units on hand.
Record the consolidation entries on
12/31/01 to eliminate the unrealized
gain.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-8
World Co.'s Consolidation Journal
Date
Description
Debit
31-Dec Sales
500,000
Cost of Goods Sold
Credit
500,000
{
Entry
TI
Inventory Transfers
Example
First, the entire
intercompany transfer
must be eliminated.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-9
Inventory Transfers
Example
Entry
TI
G
World Co.'s Consolidation Journal
Date
Description
Debit
31-Dec Sales
500,000
Cost of Goods Sold
31-Dec Cost of Goods Sold
Inventory
Credit
500,000
25,000
25,000
Next, we must eliminate the unrealized gain:
Original
Unrealized
%
Unsold
=
×
Gain
Gain
= $
$ 100,000 ×
25%
25,000
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Slide
5-10

Unrealized Inventory Gains
Effect on Noncontrolling Interest
If the transfer is DOWNSTREAM,
then any resulting unrealized gain
belongs to the parent.
 No effect on Noncontrolling Interest

If the transfer is UPSTREAM, then
any resulting unrealized gain
belongs to the subsidiary.
 Noncontrolling Interest must be
adjusted for the unrealized gain.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-11
Unrealized Inventory Gains
Effect on Noncontrolling Interest
Noncontrolling Interest in Sub Net Income = the
noncontrolling % of the sub’s net income, AFTER
eliminating UPSTREAM unrealized intercompany profit.
Subsidiary Net Income (Loss)
Less: Upstream, unrealized,
intercompany gain (losses)
= Subsidiary Net Income (Loss)
Available to Noncontrolling Shareholders
× Noncontrolling %
= Noncontrolling Interest in Subsidiary Net Income
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-12
Intercompany Land Transfers
Eliminating Unrealized Gains
ENTRY TL
If land is transferred between the parent and sub
at a gain, the gain is considered unrealized
and must be eliminated.
CONSOLIDATION JOURNAL
Date
Description
ENTRY TL
Gain on Sale of Land
Land
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-13
Intercompany Land Transfers
Eliminating Unrealized Gains
ENTRY *GL
As long as the land remains on the books of the
buyer, the unrealized gain must be eliminated
at the end of each fiscal period.
CONSOLIDATION JOURNAL
Date
Description
ENTRY *GL
R/E (Beg. Bal. of seller)
Land
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-14
Intercompany Land Transfers
Eliminating Unrealized Gains
ENTRY *GL (Year of sale)
In the year of disposal, the unrealized gain must
be eliminated one more time, and recognized
in the consolidated financial statements.
CONSOLIDATION JOURNAL
Date
Description
ENTRY *GL (Year of sale)
R/E (Beg. Bal. of seller)
Gain on Sale of Land
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-15
Land Transfers
Example
On June 25, 2000 World Co. (parent) sells
a 30 acre tract of land originally costing
$600,000 to Sub, Inc. for $750,000.
At year-end on December 31, 2002 Sub
Inc. still owns the land.
Record the appropriate consolidation
entry on 12/31/02.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-16
Entry
*GL
Land Transfers
Example
World Co.'s Consolidation Journal
Date
Description
Debit
31-Dec Retained Earnings
150,000
Land
Credit
150,000
This entry must be made at the end
of each year as long as the land is
still on the books.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-17
Intercompany Transfer of
Depreciable Assets
ENTRY TA
In the year of transfer, the unrealized gain must
be eliminated and the assets restated to
original historical cost.
CONSOLIDATION JOURNAL
Date
Description
ENTRY TA (Year of transfer)
Gain on Sale of Equipment
Equipment
Accumulated Depreciation
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-18
Intercompany Transfer of
Depreciable Assets
ENTRY ED
In addition, the buyer’s depreciation is based on
the inflated transfer price. The excess
depreciation expense must be eliminated.
CONSOLIDATION JOURNAL
Date
Description
ENTRY ED (Year of transfer)
Accumulated Depreciation
Depreciation Expense
McGraw-Hill/Irwin
Page
Debit
##
Credit
$$$
$$$
© The McGraw-Hill Companies, Inc., 2001
Slide
5-19
Intercompany Transfer of
Depreciable Assets
In Years Following the Year of Transfer
The equipment is carried on the individual
books at a different amount than on the
consolidated books.
These amounts change each year as
depreciation is computed.
To get the worksheet adjustments, compare
the individual records to the consolidated
records.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-20
Intercompany Transfer of
Depreciable Assets
Big Wheel Trucking (BWT) owns 80% of Quick
Delivery, Inc. On 1/1/00, Quick Delivery has a
truck on the books with an original cost of
$100,000, and accumulated depreciation of
$60,000 (4 year remaining useful life, $0
salvage value, straight-line).
Quick Delivery sells the truck to BWT for
$80,000.
Analyze the information in preparation for
making entries on 12/31/01.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-21
Intercompany Transfer of
Depreciable Assets
BWT's
Consolidated
Account
Records
Perspective
Equipment, 12/21/01 $ 80,000
Acc. Depr. - 12/31/01
(40,000)
Depr. Exp. - 12/31/01
20,000
1/1/01 R/E effect
Worksheet
Adjustments
(20,000)
On BWT’s books, the annual depreciation = $80,000 ÷ 4
yrs. = $20,000 per year.
The 1/1/01 R/E effect = the original gain of $40,000 on
Quick Delivery’s books less 1 year of depreciation.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-22
Intercompany Transfer of
Depreciable Assets
BWT's
Consolidated
Worksheet
Account
Records
Perspective
Adjustments
Equipment, 12/21/01 $ 80,000 $
100,000
Acc. Depr. - 12/31/01
(40,000)
(80,000)
Depr. Exp. - 12/31/01
20,000
10,000
1/1/01 R/E effect
(20,000)
10,000
For the consolidated entity, the annual depreciation =
$40,000 remaining BV ÷ 4 yrs. = $10,000 per year.
The Acc. Depr. At 12/31/01 = $60,000 accumulated
depreciation at 1/1/00 + 2 years of depreciation.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-23
Intercompany Transfer of
Depreciable Assets
BWT's
Consolidated
Worksheet
Account
Records
Perspective
Adjustments
Equipment, 12/21/01 $ 80,000 $
100,000 $
20,000
Acc. Depr. - 12/31/01
(40,000)
(80,000)
(40,000)
Depr. Exp. - 12/31/01
20,000
10,000
(10,000)
1/1/01 R/E effect
(20,000)
10,000
30,000
The consolidation worksheet
adjustments appear in the
last column.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001
Slide
5-24
Intercompany Transfer of
Depreciable Assets
ENTRY *TA (Subsequent Years)
The adjustment to fixed assets and depreciation
expense must be made in each succeeding period.
The entry for the BWT/Quick Delivery Consolidation
is:
CONSOLIDATION JOURNAL
Date
Description
ENTRY *TA (subsequent yrs.)
Equipment
R/E (Beg. of period)
Accumulated Depr.
McGraw-Hill/Irwin
Page
Debit
##
Credit
20,000
30,000
50,000
© The McGraw-Hill Companies, Inc., 2001
Slide
5-25
Intercompany Transfer of
Depreciable Assets
ENTRY ED (Subsequent Years)
In addition, we must adjust for the difference in
Depreciation Expense on the two income
statements. The entry for our example is:
CONSOLIDATION JOURNAL
Date
Description
ENTRY ED (Subsequent Year)
Accumulated Depreciation
Depreciation Expense
McGraw-Hill/Irwin
Page
Debit
##
Credit
10,000
10,000
© The McGraw-Hill Companies, Inc., 2001
Slide
5-26
End of Chapter 5
Hey, Chester, ol’
buddy!
I’m thinkin’ we
need to switch
desks in a little
“intercompany”
transfer.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2001