Advanced Accounting Ch 6 - Intercompany Transfers of...

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Intercompany Transfers of Services and Noncurrent Assets 6 Overview of the Consolidated Entity 0. Elimination of intercompany transfers 0. All aspects of intercompany transfers must be eliminated in preparing consolidated financial statements so that the statements appear as if they were those of a single company 1. No distinction is made between wholly owned and less-than-wholly owned subsidiaries 2. Focus is on the single-entity concept 1. Elimination of unrealized profits and losses 3. Profit or loss from selling an item to a related party normally is considered realized at the time of the sale from the selling company’s perspective 4. The profit is not considered realized for consolidation purposes until confirmed, usually through resale to an unrelated party 5. Unrealized intercompany profit is the unconfirmed profit from an intercompany transfer Intercompany Sale Process - Illustration
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Intercompany Sale Process - Illustration 0. Case A 0. All three transactions are completed in the same accounting period. The gain amounts reported are: 1. Case B 1. Only transaction T1 is completed during the current period. The gain amounts reported are: 2. Case C 2. Only transactions T1 and T2 are completed during the current period. The gain amounts reported are: 3. Case D 3. Only transaction T3 is completed during the current period, T1 and T2 having occurred in a prior period. The gain amounts reported are: Parent Company $ 5,000 ($15,000 - $10,000) Subsidiary Corporation 10,000 ($25,000 - $15,000) Consolidated Entity 15,000 ($25,000 - $10,000) Parent Company $ -0- Subsidiary Corporation -0- Consolidated Entity -0- Parent Company $ $5,000 ($15,000 - $10,000) Subsidiary Corporation -0- Consolidated Entity -0- Parent Company $ -0- Subsidiary Corporation 10,000 ($25,000 - $15,000) Consolidated Entity 15,000 ($25,000 - $10,000)
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Intercompany Transfers of Services 0. When one company purchases services from a related company, the purchaser typically records an expense and the seller records a revenue 0. In the consolidation workpaper, an eliminating entry would be needed to reduce both revenue (debit) and expense (credit) 1. Because the revenue and expense are equal and both are eliminated, income is unaffected by the elimination 2. The elimination is still important because otherwise both revenues and expenses are overstated Intercompany Transfers of Land 2. Overview of the profit elimination process 6. No special adjustments or eliminations are needed when land is transferred between related companies at book value 7. Land transfers at more or less than book value 4. Selling entity’s gain/ loss must be eliminated because the land is still held by the consolidated entity 5. The land must be reported at its original cost in the consolidated financial statements as long as it is held within the consolidated entity, regardless of which affiliate holds the land Intercompany Transfers of Land - Illustration 3.
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Advanced Accounting Ch 6 - Intercompany Transfers of...

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