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Intercompany Profit Transactions – Plant Assets

Intercompany Profit Transactions – Plant Assets. Iman P. Hidayat. Intercompany Profits on Nondepreciable Plant Assets. Company P. Company S. Nondepreciable asset. Intercompany Profits on Nondepreciable Plant Assets. A transfer at a price other than book

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Intercompany Profit Transactions – Plant Assets

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  1. Intercompany ProfitTransactions – Plant Assets Iman P. Hidayat

  2. Intercompany Profits onNondepreciable Plant Assets Company P Company S Nondepreciable asset

  3. Intercompany Profits onNondepreciable Plant Assets A transfer at a price other than book value gives rise to unrealized profit or loss to the consolidated entity. Any gain or loss on sales downstream from parent to subsidiary is initially included in parent company income and must be eliminated.

  4. Intercompany Profits onNondepreciable Plant Assets The amount of elimination is 100%, regardless of the minority interest percentage. Subsidiary accounts include any profit or loss from upstream sales. The parent company recognizes only its share of the subsidiary’s income.

  5. Downstream Sale of Land Stan is a 90%-owned subsidiary of Park Corporation, acquired for $270,000 on January 1, 2005. Cost was equal to book value and fair value. Stan’s net income for 2005: $70,000 Park’s income (excluding Stan’s income): $90,000 Park’s income includes a $10,000 unrealized gain from sale of land to Stan that cost $40,000.

  6. Downstream Sale of Land Park entries Investment in Stan 63,000 Income from Stan 63,000 To record 90% of Stan’s reported income

  7. Downstream Sale of Land Park entries Cash 50,000 Land 40,000 Gain 10,000 To record sale of land to Stan 0ffset Income from Stan 10,000 Investment in Stan 10,000 To eliminate unrealized profit on land sold to Stan

  8. Working Papers December 31, 2005 Income Statement Adjustments/ Consol- Park Stan Eliminations idated Sales Income from Stan Gain on sale of land Expenses Minority interest expense ($70,000 × 10%) Net income Retained earnings – Park Retained earnings – Stan Add: Net income Retained earnings 12/31 $380 53 10 (300) $143 $207 143 $350 $220 (150) $ 70 $100 70 $170 b 53 a 10 c 7 d 100 $600 (450) (7) $143 $207 143 $350

  9. Working Papers December 31, 2005 Balance Sheet Adjustments/ Consol- Park Stan Eliminations idated Other assets Land Investment in Stan Liabilities Capital stock Retained earnings Minority interest $477 323 $800 $ 50 400 350 $800 $350 50 $400 $ 30 200 170 $400 a 10 b 53 d 270 d 200 c 7 d 30 $827 40 $867 $ 80 400 350 37 $867

  10. Upstream Sale of Land Now, assume that Stan sells land to Park with a cost of $40,000 for $50,000. The net incomes for Stan and Park remain the same, but the unrealized profit on the sale of land is now reflected in the income of Stan, rather than Park.

  11. Upstream Sale of Land Park entries Investment in Stan 63,000 Income from Stan 63,000 To record 90% of Stan’s reported net income Income from Stan 9,000 Investment in Stan 9,000 To eliminate 90% of the unrealized profit on land purchased from Stan

  12. Working Papers December 31, 2005 Income Statement Adjustments/ Consol- Park Stan Eliminations idated Sales Income from Stan Gain on sale of land Expenses Minority interest expense ($70,000 × 10%) Net income Retained earnings – Park Retained earnings – Stan Add: Net income Retained earnings 12/31 $390 54 (300) $144 $207 144 $351 $210 10 (150) $ 70 $100 70 $170 b 54 a 10 c 6 d 100 $600 (450) (6) $144 $207 144 $351

  13. Working Papers December 31, 2005 Balance Sheet Adjustments/ Consol- Park Stan Eliminations idated Other assets Land Investment in Stan Liabilities Capital stock Retained earnings Minority interest $427 50 324 $801 $ 50 400 351 $801 $400 $400 $ 30 200 170 $400 a 10 b 54 d 270 d 200 c 6 d 30 $827 40 $867 $ 80 400 351 36 $867

  14. Downstream Sale ofDepreciable Plant Assets Perry, Corporation sells machinery to its 80%-owned subsidiary, Soper Corporation, on December 31, 2003. Book value: $90,000 – $40,000 = $50,000 Perry sold the machine for $80,000. What are the journal entries?

  15. Downstream Sale ofDepreciable Plant Assets Perry’s Books Cash 80,000 Accumulated Depreciation 40,000 Machinery 90,000 Gain on Sale of Machinery 30,000 To record sale of machine to Soper

  16. Downstream Sale ofDepreciable Plant Assets Perry’s Books Income from Soper 30,000 Investment in Soper 30,000 To offset the unrealized gain Investment in Soper 6,000 Income from Soper 6,000 To partially recognize the gain over five years

  17. Downstream Sale ofDepreciable Plant Assets Soper’s Books Machinery 80,000 Cash 80,000 To record purchase of machine from Perry

  18. Working Papers Adjustment Gain on Sale of Machinery 30,000 Machinery 30,000 To eliminate gain and adjust machinery

  19. Sale in Subsequent Year toOutside Entity Assume that Stan uses the land for three years and sells it for $65,000 in 2009. Stan gain: $65,000 – $50,000 = $15,000 Consolidated entity: $65,000 – $40,000 = $25,000

  20. Sale in Subsequent Year toOutside Entity Park's Books Investment in Stan 10,000 Income from Stan 10,000 To recognize previously deferred profit on sale to Stan

  21. Sale in Subsequent Year toOutside Entity Stan's Books Cash 65,000 Land 50,000 Gain 15,000 To record sale of land

  22. Sale in Subsequent Year toOutside Entity Working Papers Entry Investment in Stan 10,000 Gain on Land 10,000 To adjust gain on land to the $25,000 gain to the consolidated entry

  23. Upstream Sale of Land:Minority Interest Stan’s reported net income: $70,000 70,000 $63,000 to Park $7,000 to MI

  24. Upstream Sale of Land:Minority Interest Stan’s reported net income: $70,000 Unrealized gain: –10,000 Realized net income: $60,000 60,000 $54,000 to Park $6,000 to MI

  25. Consolidated Example Plank Corporation acquired a 90% interest in Sharp Corporation at its book value of $450,000 on January 3, 2005. On July 1, 2005, Plank sold land to Sharp at a gain of $5,000. During 2007, Sharp sold the land to an outsider at a loss to Sharp of $1,000.

  26. Consolidated Example On January 2, 2006, Sharp sold equipment with a five-year remaining life to Plank at a gain of $20,000. Plank still had the equipment on 12/31/2007. On January 5, 2007, Plank sold a building to Sharp at a gain of $32,000. The remaining useful life on this date was 8 years. Sharp still owned the building on 12/31/2007.

  27. Consolidated Example Underlying equity in Sharp 12/31/2006 ($600,000 equity of Sharp × 90%) $540,000 Less: Unrealized profit on land (5,000) Unrealized profit on equipment ($16,000 × 90 %) (14,400) Investment in Sharp 12/31/2006 $520,600

  28. Consolidated Example Investment in Sharp 12/31/2006 $520,600 Add: Income from Sharp ($80,000 × 90%) 72,000 Gain on land 5,000 Piecemeal recognition of gain on equipment 3,600 Deduct: Unrealized profit on building (28,000) Dividends received 2007 (27,000) Investment in Sharp 12/31/2007 $546,200

  29. Working Paper Entries a Investment in Sharp 5,000 Gain on Land 5,000 To recognize previously deferred gain on land

  30. Working Paper Entries b Investment in Sharp 14,400 Minority Interest January 1 1,600 Accumulated Depreciation 8,000 Depreciation Expense 4,000 Equipment 20,000 To eliminate unrealized profit on upstream sale of equipment

  31. Working Paper Entries c Gain on Buildings 32,000 Accumulated Depreciation 4,000 Buildings 32,000 Depreciation Expense 4,000 To eliminate unrealized gain on the downstream sale of buildings

  32. Working Paper Entries d Income from Sharp 52,600 Dividends 27,000 Investment in Sharp 25,600 To eliminate income and dividend from subsidiary

  33. Working Paper Entries e Minority Interest Expense 8,400 Dividends – Sharp 3,000 Minority Interest 5,400 To enter minority interest share of subsidiary income and dividends

  34. Working Paper Entries f Retained Earnings – Sharp 200,000 Capital Stock – Sharp 400,000 Investment in Sharp 540,000 Minority Interest – Beginning 60,000 To eliminate reciprocal investment and equity balances

  35. Inventory Items Purchased forUse as Operating Assets Paco Electronics sells a computer that it manufactures at a cost of $150,000 to Santana. The selling price is $200,000. Santana is Paco’s 100%-owned subsidiary. The computer has a five-year expected useful live.

  36. Working Paper Entries:Year of Sale Sales 200,000 Cost of Sales 150,000 Equipment 50,000 To eliminate intercompany sales and to reduce cost of sales and equipment for the cost and gross profit, respectively

  37. Working Paper Entries:Year of Sale Accumulated Depreciation 10,000 Depreciation Expense 10,000 To eliminate depreciation on the gross profit from the sale ($50,000 ÷ 5)

  38. Working Paper Entries:Second Year Investment in Santana 40,000 Accumulated Depreciation 20,000 Equipment 50,000 Depreciation Expense 10,000 To reduce equipment to its cost basis to the consolidated entity, to eliminate the effect of the intercompany sale from depreciation expense and accumulated depreciation, and to establish reciprocity between beginning-of-the-period equity and investment amounts

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