11.1-3 Lecture_5_6_9_October_Intragroup_Land_and_Plant_Salesrevised

11.1-3 Lecture_5_6_9_October_Intragroup_Land_and_Plant_Salesrevised

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1 ACIS 211 Company Accounting 2009 Intragroup Land and Fixed Asset Transactions Bill Foster Room 619 bill.foster@canterbury.ac.nz
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2 Tutorial exercises: week commencing 12 Oct Fixed asset profit problem 1 Fixed asset profit problem 3 In your own time: week commencing 12 Oct Fixed asset profit problem 2 Fixed asset profit problem 4
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3 Overview I. Income tax considerations II. Intragroup land transactions III. Downstream land sale IV. Upstream land sale V. Intragroup PP&E transactions VI. Downstream sale of plant VII. Upstream sale of plant at the end of the year VIII. In-class example
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4 Reading NZ IAS 27 Deegan & Samkin Chapter 25 Alfredson Chapter 21
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5 I. Income tax considerations In order to facilitate a better understanding of the process of consolidation, we will ignore income tax effects
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6 II. Intragroup land transactions Land transfers at other than the carrying amount result in unconfirmed gains or losses to the consolidated entity These gains and losses are deferred on the worksheet until the land is sold to an outside entity Intragroup land transactions necessitate additional worksheet entries and additional equity method thinking entries
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7 III. Downstream land sale P owns 90% of S P sells land to S in year 1 for 50,000 The land has a carrying amount on P’s books of 40,000 The entries on both sets of books are P Co S Co Cash 50,000 Land 50,000 Land 40,000 Cash 50,000 Gain 10,000
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8 At the end of year 1 S still has the land The gain of 10,000 is unconfirmed from a consolidated standpoint We will need an additional worksheet entry to take the gain away and bring the land account down to the cost to the consolidated entity year 1 worksheet #10 Gain 10,000 Land 10,000
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9 Item P Co S Co Dr Cr Consolidated Gain on sale of land 10,000 -0- (10)10,000 -0- The top tier in year 1 looks like -- the consolidated column reflects our objective of reporting no gain until the land is sold to outsiders
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10 Item P Co S Co Dr Cr Consolidated Land 50,000 (10)10,000 40,000 The bottom tier in year 1 looks like – the cost of the land is the cost to the consolidated entity (P’s cost)-- 40,000
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11 There is an additional equity method thinking entry that is necessary Take the gain away with equity method entries, by giving P a loss – a debit to the investment income account With downstream sales, the NCI is not involved and equity method entries are prepared 100% of the gain or loss Investment Income 10,000 Investment in S 10,000 π in Land P S 10,000
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12 In year 2 S still has the land The year 1 worksheet entry that reduced the land by 10,000 was just that, a worksheet-only entry S still has the land on its books at 50,000 At the end of year 1, P closed the gain into its retained earnings P’s beginning retained earnings needs to be decreased year 2 worksheet #10 RE beg 10,000 Land 10,000 This entry affects the middle and the bottom tiers
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13 No further equity method thinking entries are required until the land is sold to outsiders
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14 In year 3 S sells the land to outsiders for 65,000 Both worksheet entries and equity method thinking entries are affected when the intragroup gain/loss on land sales is confirmed with a sale to outsiders
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11.1-3 Lecture_5_6_9_October_Intragroup_Land_and_Plant_Salesrevised

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