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©2009 Accounting Department, University Of Siliwangi
Intercompany ProfitTransactions – Plant Assets
Iman P. Hidayat
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©2009 Accounting Department, University Of Siliwangi
Intercompany Profits onNondepreciable Plant Assets
Nondepreciable asset
Company P Company S
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©2009 Accounting Department, University Of Siliwangi
Intercompany Profits onNondepreciable Plant Assets
A transfer at a price other than bookvalue gives rise to unrealized profitor loss to the consolidated entity.
Any gain or loss on sales downstreamfrom parent to subsidiary is initiallyincluded in parent company income
and must be eliminated.
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©2009 Accounting Department, University Of Siliwangi
Intercompany Profits onNondepreciable Plant Assets
The amount of elimination is 100%,regardless of the minority
interest percentage.
Subsidiary accounts include anyprofit or loss from upstream sales.
The parent company recognizes onlyits share of the subsidiary’s income.
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©2009 Accounting Department, University Of Siliwangi
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: $70,000Park’s income (excluding Stan’s income): $90,000
Park’s income includes a $10,000 unrealized gainfrom sale of land to Stan that cost $40,000.
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©2009 Accounting Department, University Of Siliwangi
Downstream Sale of Land
Investment in Stan 63,000Income from Stan 63,000
To record 90% of Stan’s reported income
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©2009 Accounting Department, University Of Siliwangi
Downstream Sale of Land
Cash 50,000Land 40,000Gain 10,000
To record sale of land to StanIncome from Stan 10,000
Investment in Stan 10,000To eliminate unrealized profit on land sold to Stan
0ffset
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©2009 Accounting Department, University Of Siliwangi
Working Papers December 31, 2005
Adjustments/ Consol-Park Stan Eliminations idated
SalesIncome from StanGain on sale of landExpensesMinority interest expense ($70,000 × 10%)Net incomeRetained earnings – ParkRetained earnings – StanAdd: Net incomeRetained earnings 12/31
$380 53 10 (300)
$143 $207
143 $350
$220
(150)
$ 70
$100 70$170
b 53a 10
c 7
d 100
$600
(450)
(7) $143 $207
143 $350
Income Statement
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©2009 Accounting Department, University Of Siliwangi
Working Papers December 31, 2005
Other assetsLandInvestment in Stan
LiabilitiesCapital stockRetained earningsMinority interest
$477
323
$800 $ 50 400 350
$800
$350 50
$400$ 30 200 170
$400
a 10b 53d 270
d 200
c 7d 30
$827 40
$867 $ 80 400 350
37 $867
Adjustments/ Consol-Park Stan Eliminations idatedBalance Sheet
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©2009 Accounting Department, University Of Siliwangi
Upstream Sale of Land
Now, assume that Stan sells land to Parkwith a cost of $40,000 for $50,000.
The net incomes for Stan and Park remainthe same, but the unrealized profit on the
sale of land is now reflected in the incomeof Stan, rather than Park.
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©2009 Accounting Department, University Of Siliwangi
Upstream Sale of Land
Income from Stan 9,000Investment in Stan 9,000
To eliminate 90% of the unrealized profiton land purchased from Stan
Investment in Stan 63,000Income from Stan 63,000
To record 90% of Stan’s reported net income
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©2009 Accounting Department, University Of Siliwangi
Working Papers December 31, 2005
Adjustments/ Consol-Park Stan Eliminations idated
SalesIncome from StanGain on sale of landExpensesMinority interest expense ($70,000 × 10%)Net incomeRetained earnings – ParkRetained earnings – StanAdd: Net incomeRetained earnings 12/31
$390 54 (300)
$144 $207
144 $351
$210
10(150)
$ 70
$100 70$170
b 54a 10
c 6
d 100
$600
(450)
(6) $144 $207
144 $351
Income Statement
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©2009 Accounting Department, University Of Siliwangi
Working Papers December 31, 2005
Other assetsLandInvestment in Stan
LiabilitiesCapital stockRetained earningsMinority interest
$427 50 324
$801 $ 50 400 351
$801
$400
$400$ 30 200 170
$400
a 10b 54d 270
d 200
c 6d 30
$827 40
$867 $ 80 400 351
36 $867
Adjustments/ Consol-Park Stan Eliminations idatedBalance Sheet
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©2009 Accounting Department, University Of Siliwangi
Downstream Sale ofDepreciable Plant Assets
Perry, Corporation sells machinery to its80%-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?
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©2009 Accounting Department, University Of Siliwangi
Downstream Sale ofDepreciable Plant Assets
Cash 80,000Accumulated Depreciation 40,000
Machinery 90,000Gain on Sale of Machinery 30,000
To record sale of machine to Soper
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©2009 Accounting Department, University Of Siliwangi
Downstream Sale ofDepreciable Plant Assets
Income from Soper 30,000Investment in Soper 30,000
To offset the unrealized gain
Investment in Soper 6,000Income from Soper 6,000
To partially recognize the gain over five years
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©2009 Accounting Department, University Of Siliwangi
Downstream Sale ofDepreciable Plant Assets
Machinery 80,000Cash 80,000
To record purchase of machine from Perry
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©2009 Accounting Department, University Of Siliwangi
Working Papers Adjustment
Gain on Sale of Machinery 30,000Machinery 30,000
To eliminate gain and adjust machinery
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©2009 Accounting Department, University Of Siliwangi
Sale in Subsequent Year toOutside Entity
Assume that Stan uses the land for threeyears and sells it for $65,000 in 2009.
Stan gain:$65,000 – $50,000 = $15,000
Consolidated entity:$65,000 – $40,000 = $25,000
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©2009 Accounting Department, University Of Siliwangi
Sale in Subsequent Year toOutside Entity
Investment in Stan 10,000Income from Stan 10,000
To recognize previously deferred profiton sale to Stan
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©2009 Accounting Department, University Of Siliwangi
Sale in Subsequent Year toOutside Entity
Cash 65,000Land 50,000Gain 15,000
To record sale of land
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©2009 Accounting Department, University Of Siliwangi
Sale in Subsequent Year toOutside Entity
Investment in Stan 10,000Gain on Land 10,000
To adjust gain on land to the $25,000 gainto the consolidated entry
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©2009 Accounting Department, University Of Siliwangi
Upstream Sale of Land:Minority Interest
Stan’s reported net income: $70,000
70,000
$63,000 to Park $7,000 to MI
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©2009 Accounting Department, University Of Siliwangi
Upstream Sale of Land:Minority Interest
Stan’s reported net income: $70,000Unrealized gain: –10,000Realized net income: $60,000
60,000
$54,000 to Park $6,000 to MI
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©2009 Accounting Department, University Of Siliwangi
Consolidated Example
Plank Corporation acquired a 90% interestin Sharp Corporation at its book value of
$450,000 on January 3, 2005.
On July 1, 2005, Plank sold landto Sharp at a gain of $5,000.
During 2007, Sharp sold the land to anoutsider at a loss to Sharp of $1,000.
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©2009 Accounting Department, University Of Siliwangi
Consolidated Example
On January 2, 2006, Sharp sold equipment with afive-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 buildingto 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.
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©2009 Accounting Department, University Of Siliwangi
Consolidated Example
Underlying equity in Sharp 12/31/2006 ($600,000 equity of Sharp × 90%) $540,000Less: Unrealized profit on land (5,000)
Unrealized profit on equipment ($16,000 × 90 %) (14,400)
Investment in Sharp 12/31/2006 $520,600
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©2009 Accounting Department, University Of Siliwangi
Consolidated Example
Investment in Sharp 12/31/2006 $520,600Add: Income from Sharp
($80,000 × 90%) 72,000Gain on land 5,000Piecemeal 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
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries
a Investment in Sharp 5,000Gain on Land 5,000
To recognize previously deferred gain on land
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries
b Investment in Sharp 14,400Minority Interest January 1 1,600Accumulated Depreciation 8,000
Depreciation Expense 4,000Equipment 20,000
To eliminate unrealized profit on upstreamsale of equipment
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries
c Gain on Buildings 32,000Accumulated Depreciation 4,000
Buildings 32,000Depreciation Expense 4,000
To eliminate unrealized gain on the downstreamsale of buildings
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries
d Income from Sharp 52,600Dividends 27,000Investment in Sharp 25,600
To eliminate income and dividendfrom subsidiary
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries
e Minority Interest Expense 8,400Dividends – Sharp 3,000Minority Interest 5,400
To enter minority interest share of subsidiaryincome and dividends
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries
f Retained Earnings – Sharp 200,000Capital Stock – Sharp 400,000
Investment in Sharp 540,000Minority Interest – Beginning 60,000
To eliminate reciprocal investment andequity balances
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©2009 Accounting Department, University Of Siliwangi
Inventory Items Purchased forUse as Operating Assets
Paco Electronics sells a computer that itmanufactures 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.
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries:Year of Sale
Sales 200,000Cost of Sales 150,000Equipment 50,000
To eliminate intercompany sales and to reducecost of sales and equipment for the cost andgross profit, respectively
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries:Year of Sale
Accumulated Depreciation 10,000Depreciation Expense 10,000
To eliminate depreciation on the gross profit fromthe sale ($50,000 ÷ 5)
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©2009 Accounting Department, University Of Siliwangi
Working Paper Entries:Second Year
Investment in Santana 40,000Accumulated Depreciation 20,000
Equipment 50,000Depreciation Expense 10,000
To reduce equipment to its cost basis to the consolidatedentity, to eliminate the effect of the intercompany salefrom depreciation expense and accumulated depreciation,and to establish reciprocity between beginning-of-the-periodequity and investment amounts