Chapter 7: Intercompany transfer of services and LT assets

Question 1

Fully adjusted equity entry on parent’s books to defer gain

Answer 1

Dr Income from Sub
CR investment in sub

reversed when asset sold to outside party

Downstream sale or wholly owned upstream sale = 100% of profit
Partially owned upstream sale = percentage of profit

Question 2

Inter-company transfer of non-current assets

Answer 2

If asset is transferred at something other than book value

• parent must defer any unrealized gain or loss until outside is sold to an unrelated party/parties
• consolidated entity must eliminated gain or loss
• asset must be reported on consolidated statement at original cost as long as held within the consolidated entity

Question 3

Inter-company transfer of service profit not realized in period of sale

Answer 3

May have to eliminate revenue and expense until profit is realized

may be over course of multiple periods (if service is something that is realized over the life of something)

Question 4

Inter-company transfer of service profit realized in period of sale

Answer 4

Assuming services transferred benefit the current period no elimination entries necessary

Question 5

Downstream sale

Answer 5

Parent selling to a subsidiary

gain or loss accrues to parent entity’s stockholders

Question 6

Upstream sale

Answer 6

Subsidiary selling to parent

gain or loss accrues to subsidiary entity’s stockholders - parent may be whole or part of that

so if not wholly owned, the gain or loss on upstream sale must be apportioned

Question 7

Unrealized gain on upstream income

Answer 7

Inter-company gain included in subsidiary net income and shared proportionately by the parent and NCI
THEN percentage deferral of upstream sale removed

Whole gain still eliminated in consolidation, just must be allocated

Question 8

Income assigned to NCI

Answer 8

NCIs proportionate share of subsidiary’s reported net income realized in transactions with parties external to entity

must also recognized NCI percentage of unrealized inter-company gain, reduces NCI share in net income IF upstream sale (not if downstream)

Question 9

Equity entry to adjust for unrealized gain

Answer 9

DR income from subsidiary
CR investment in subsidiary

At 100% of gain if: downstream sale, or upstream sale by a wholly owned subsidiary

Proportional percentage of gain if: upstream sale by a partially owned subsidiary

adjusts both unrealized gain and incorrectly stated asset

Question 10

Adjustment to basic consolidation entry where gross profit was deferred by parent’s equity entry

Answer 10

must decrease both parent share of net income and parent share of book value of investment in subsidiary by amount of deferred gain

Question 11

Additional consolidation entry to remove unrealized gain and revalue unsold inventory

Answer 11

DR gain on a sale (parent overstatement of gain)
CR Inventory (subsidiary overstatement of asset account)

states assets as correct inter-company price and removes unrealized gain

in later periods if the asset is still held
DR Investment in subsidiary
CR asset

Question 12

Unrealized gain on downstream sale

Answer 12

Percentage of share of subsidiary’s income calculated before removing whole of unrealized gain

no affect on NCI share of net income or net assets of sub

Question 13

Consolidation entry if downstream transfer asset is held in years subsequent to transaction

Answer 13

DR investment in subsidiary (corrects artificially low balance)
CR asset (corrects to original price)

must be done every year as long as the affiliate holds the asset

Question 14

Equity entry when deferred gain is realized

Answer 14

Realized = asset sold to non-affiliated entity

DR investment in subsidiary
CR income from subsidiary

Simply reverses deferral entry

Question 15

Adjustment to basic consolidation entry when downstream deferred gain is realized

Answer 15

If original transaction was downstream affects only the parent’s share, not CI

Add deferred gain to both:
Income from subsidiary
Investment in subsidiary

Question 16

Consolidation entry downstream sale gain realized entry to recognize gain

Answer 16

DR Investment in subsidiary
CR gain on sale of asset

no entry or asset because asset is gone as of sale

brings total gain to correct amount based on original price

Question 17

Difference in consolidation entries for upstream vs downstream sales

Answer 17

Realized gain on inter-company sale = same consolidation entries for upstream and downstream

UNREALIZED gain on inter-company sale: upstream sale must apportion unrealized gain between parent and NCI

Question 18

Equity entry for deferral of unrealized gain: upstream sale, partial ownership

Answer 18

DR income from sub
CR investments in sub

But only for PROPORTIONAL share of unrealized gain

decrease in investment from subsidiary corrects overstated asset account
decrease in income from subsidiary corrects overstated share of unrealized gain

Question 19

Adjustments to basic consolidated entry: unrealized gain on upstream sale, partial ownership

Answer 19

Must subtract proportional share of unrealized gain from:
- income from subsidiary
- investment in subsidiary
AND:
- NCI in net income of subsidiary
- NCI in net assets of subsidiary

Question 20

Consolidation entry to remove unrealized inter-company gain: upstream sale, partial ownership

Answer 20

DR Gain on sale of asset
CR asset

Sale as downstream entry

Question 21

Consolidation entry if upstream sale asset is still held (partial ownership) in future years

Answer 21

DR investment in subsidiary
DR NCI in Net assets of subsidiary
CR Asset

(invesment and NCI in net assets are both artifically low so must adjust values to correct)

no affect on total income

Question 22

Consolidation entry to recognize gain on inter-company, upstream sale (partially owned)

Answer 22

DR investment in subsidiary
DR investment in net assets of subsidiary
CR gain on sale of asset

to recognize full amount of deferred inter-company profit

Question 23

Unrealized inter-company profits on depreciable/ amortized assets

Answer 23

Viewed as being realized gradually over the remaining economic life of the asset as if used by the purchasing affiliate in generating revenue from unaffiliated parties

so a portion of the deferred gain or loss is realized each period

Question 24

Depreciation on asset purchased from an affiliate

Answer 24

On consolidated books must be as if sale never occurred (still being depreciated based on original cost)

must restate asset, accumulated depreciation and depreciation expense to amounts that would have been on inter-company statements without transfer

Question 25

Dealing with unrealized gains or losses on consolidation

Answer 25

Must be eliminated 100% against parent if downstream sale or wholly owned against parent and NCI if upstream and not wholly owned

Question 26

When is a gain or loss realized

Answer 26

Generally when a sale is made to an unrelated, external party

Question 27

Income to controlling interest with unrealized gain on downstream transfer

Answer 27

Downstream transfer = doesn't matter if wholly or partially owned Subsidiary net income x parent ownership = parent share of subsidiary net income less 100% deferral from unrealized gain = parent income from sub + parent separate income (including gain) = income to controlling interest

Question 28

Income to controlling interest with unrealized gain on UPSTREAM tranfser

Answer 28

Upstream transfer = must consider any NCI Subsidiary's operating income + upstream inter-company gain = subsidiary report net income x parent's ownership percentage = parent's share of subsidiary's reported income less parents % deferral of upstream unrealized gain = parent's income from subsidiary + parent's separate income = income to controlling interest

Question 29

Consolidation entry to adjust value on non-current transferred asset

Answer 29

If asset not sold in same period as transfer AND gain realized on sale DR Gain on sale of asset CR asset

Question 30

Consolidation entry to eliminate gain on sale + adjust depreciable asset: 1st year of transfer

Answer 30

Downstream sale Must: - remove parent gain - correct basis basis of asset on subsidiary's book as if sale had not happened DR Gain on Sale DR Asset CR Accumulated depreciation Since no additional depreciation has yet be recorded it gets adjusted to balance that was on parent's books at time of transfer

Question 31

Parent Equity method entry to adjust for "extra" depreciation from inter-company transfer

Answer 31

With deferred gain Gain / useful life = additional depreciation DR investment in subsidiary (amount of additional depreciation) CR income from subsidiary removes PART of deferred gain done every year subsidiary holds asset until the asset is fully depreciated or until asset sold or disposed of

Question 32

Consolidation entries: depreciable asset, downstream transfer at a gain, subsequent years of ownership

Answer 32

DOWNSTREAM SALE (or upstream, wholly owned) - increase investment in subsidiary and income from subsidiary by the amount of extra depreciation (= gain/ useful life. aka partial recognized gain) - adjust accumulated depreciation and depreciation expense to remove extra depreciation - restate balance sheet accounts so that: - asset and accumulated depreciation are at values as if still on parent books (against investment in subsidiary for the amount of unrealized gain)

Question 33

Consolidated net income with partial realization of deferred gain

Answer 33

Deferred gain on downstream/ wholly owned subsidiary Parent income + realized portion of inter-company gain on downstream sale = parent separate realized income + subsidiary net income = consolidated net income - income to non-controlling interest = income to controlling interest

Question 34

Consolidation entries for inter-company transferred asset after fully depreciation (and gain fully realized)

Answer 34

DR Asset CR accumulated depreciation for difference between original and transfer cost

Question 35

How consolidation entries for depreciable asset transferred (downstream) at a gain change over the years

Answer 35

Same relabeling every year DR Accumulated Depreciation CR depreciation expense (amount of extra depreciation) revaluation entry for asset and accumulated depreciation: DR Investment in subsidiary: (amount declines as gain written off) DR Asset (never changes) CR Accumulated depreciation (declines as gain is written off)

Question 36

Change in estimated life of asset of asset on transfer

Answer 36

Same as if asset remained on transferor's books new remaining useful life used as basis for depreciation by transferee and for consolidated statement

Question 37

Difference between upstream sale and downstream sale

Answer 37

If there is a non-controlling interest then, with a downstream sale, the unrealized profit and all subsequent realizations must be split proportionately between parent and NCI

Question 38

Fully adjusted equity method deferred gain (upstream sale, not wholly owned)

Answer 38

DR income from subsidiary CR investment in subsidiary but only for PROPORTION of gain

Question 39

Basic consolidation entry adjusted for gain on upstream sale in year of sale

Answer 39

DR Common stock DR Retained earnings DR income from sub DR NCI in net income from sub CR Dividends declared CR investment in sub CR NCI in net assets of sub (all parent and NCI entries are decreased by proportional amount of deferred gain)

Question 40

Consolidation entry to eliminate unrealized gain: year of sale, upstream sale with NCI

Answer 40

Remove gain on sale and adjust asset back to transferror's value (asset and accumulated depreciation) DR gain on sale (remove all) DR asset (return to historical cost) CR Accumulated depreciation (replace transferor's value) No different for upstream or downstream until gain is realized NCI in net income calculated from realized only, not including gain

Question 41

Equity method entries to reverse deferred gain: upstream sale, depreciated asset with NCI

Answer 41

Each year adjust to recognize ownership percentage of (deferred gain / useful life) DR investment in subsidiary CR income from subsidiary

Question 42

Basic consolidation entry: subsequent years after upstream sale of depreciable asset, with NCI

Answer 42

Adjust: income from subsidiary and investment in subsidiary, up by proportional amount of parent's recognized gain NCI in net income from sub and NCI in net assets of sub, up by proportional amount of NCI's recognized gain

Question 43

Upstream sale: subsequent years, depreciation expense adjustment entry

Answer 43

DR Accumulated depreciation CR depreciation expense by difference between what depreciation should be without transfer and how it was recorded

Question 44

Consolidation entries to adjust asset from upstream transfers (with depreciation and NCI)

Answer 44

DR investment in sub (proportional amount of deferred outstanding gain) DR NCI in NA of sub (proportional amount of deferred outstanding gain) DR asset (to historical cost) CR accumulated depreciation (to bring to amount would be without transfer)

Question 45

Calculating NCI in net assets of subsidiary in subsequent years from deferred gain

Answer 45

Book value of sub: common stock + retained earnings = total Less: unrealized inter-company gain (total) + gain realized in subsequent years = realized book value of subsidiary x NCI share = NCI in net assets of subsidiary

Question 46

If the transfer occurs at the beginning or middle of a period vs at the end

Answer 46

1st year consolidation entries will include adjustment to make depreciation expense/ accumulated depreciation what it would have been had transfer ot occured

Question 47

Inter-company transfers of amortizable assets

Answer 47

Same consolidation principle, just without use of accumulated deprecation account (so balance of asset account changes instead)