LN -Inter-entity asset Transaction (Ch 5 and Ch 6)

LN -Inter-entity asset Transaction (Ch 5 and Ch 6) - Ch 5...

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Unformatted text preview: Ch 5 and Ch 6: Intra-entity transaction ACCT 501, SP 12 1 1. Review in Ch 1: Intra-entity Asset Transaction 1) Two types of intra-entity sales/transfers A. Downstream sale/transfer • Occurs when the parent sells/transfer to a subsidiary B. Upstream sale/transfer • Occurs when a subsidiary sells/transfers to a parent 2) The individual accounting systems of the two companies will record the transfer as a sale by one party and as a purchase by the other. 3) Parent uses equity method: gains derived from intra-entity transactions are not considered completely earned until the transferred goods are either consumed or resold to unrelated parties. A. When all or a portion of the transferred goods are not consumed or resold to unrelated parties by the end of the fiscal year, all or a portion of intra-entity gains should be deferred. B. The amount of gain to be deferred is (parent’s ownership percentage multiplied by) the markup on the merchandise remaining at the end of the year. C. When the merchandise is subsequently consumed or resold to unrelated parties, the deferred gain should be recognized in the same period. 2. Single Economic Entity 1) Transactions between the parent and subsidiary are considered “internal” transactions of a single economic entity . 2) Consolidated statements present financial performance and status of consolidated companies as a single economic entity • Intra-entity transactions must be removed . Ch 5 and Ch 6: Intra-entity transaction ACCT 501, SP 12 2 Part I: Intra-entity inventory transfers (Ch 5) 1. Elimination of Intra-entity Inventory Transfers in the consolidation process 1) The sales (revenue) and purchases (expense) balances created by the transfer must be eliminated (Entry Tl) 2) Unrealized gross profit may exist if intra-entity transfer price differs from cost and goods remain in the affiliated entity at year-end A. For consolidation purposes, this intra-entity gross profit must be deferred by eliminating the amount from the inventory account on the balance sheet and from the ending inventory figure within cost of goods sold (Entry G). B. Because the effects of the transfer carry over into the subsequent fiscal period, the unrealized gross profit must also be removed a second time (Entry *G): a. from the beginning inventory component of cost of goods sold and b. from the beginning retained earnings balance of the original seller. • Exception: when the parent uses the equity method to account for its investment in the subsidiary and the transfer was made downstream (by the parent), the adjustment is to the Equity in Investment Earnings account instead of the beginning retained earnings balance. C. The consolidation process is designed to ___________________ from the period of transfer into the time period in which the goods are actually sold to unrelated parties or consumed. Ch 5 and Ch 6: Intra-entity transaction ACCT 501, SP 12 3 2. Effect of deferral process on the valuation of a noncontrolling interest...
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This note was uploaded on 02/22/2012 for the course ACCT 501 taught by Professor Ma during the Spring '11 term at South Carolina.

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LN -Inter-entity asset Transaction (Ch 5 and Ch 6) - Ch 5...

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