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class 7 slides final - RSM321 Class 7 Intercompany Profits...

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 1 Fall 2010 Advanced Financial Accounting RSM 321 Class 7: Intercompany Profits in Depreciable Assets
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 2 Please Note: While examples in these class notes are adapted straight from the textbook, there is a difference in the years used. More specifically, while years 1 and 2 are used in the textbook, years 4 and 5 are used in these notes. Note that this is only a cosmetic difference. All other numbers are the same between these notes and the textbook.
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 3 Intercompany Profits in Depreciable Assets We have now established the basis for preparation of consolidated financial statements, including: The allocation of the acquisition price The conceptual alternatives Consolidation using the cost and equity methods Elimination of intercompany sales and purchases Elimination of unrealized intercompany profits on inventory and land Parents and subsidiaries also engage in more complex transactions such as intercompany transfers of depreciable assets
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 4 Intercompany Profits in Depreciable Assets Parents and subsidiaries often redistribute depreciable assets among themselves, for a variety of reasons including management, income tax, and corporate restructuring Such transactions usually are recorded at the market value of the assets transferred: The selling company will record a gain (or loss) on the sale, and the buying company will record the assets at the price it paid, often higher than the original cost of the asset to the combined entity
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 5 Intercompany Profits in Depreciable Assets The gain or loss on intercompany asset sales is unrealized to the group until the asset is subsequently sold to a buyer outside the group The effect of the gain or loss is eliminated in the consolidated financial statements The objective of the elimination is to report “as if” the transaction between the companies had never taken place This hold back is similar to inter-company inventory and land (previous class) but the realization concepts are different because they are based on consumption rather than sale.
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 6 Intercompany Profits in Depreciable Assets The intercompany sale of depreciable assets at a profit or loss results in depreciation being recorded by the
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