Chap005 Advanced Accounting solution

Chap005 Advanced Accounting solution - Chapter 05 -...

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Unformatted text preview: Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions CHAPTER 5 CONSOLIDATED FINANCIAL STATEMENTS - INTRA-ENTITY ASSET TRANSACTIONS Chapter Outline I. The transfer of assets between the companies forming a business combination is a common practice. The opportunity for such direct acquisition (especially of inventory) is often the underlying motive for the creation of the combination. II. Intra-entity inventory transfers A. 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 B. Because the transaction was not made with an outside, unrelated party, the sales and purchases balances created by the transfer must be eliminated in the consolidation process (Entry Tl) C. Any transferred inventory retained at the end of the year is recorded at its transfer price which in (many cases) will include an unrealized gross profit 1. 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). 2. Because the effects of the transfer carry over into the subsequent fiscal period, the unrealized gross profit must also be removed a second time: from the beginning inventory component of cost of goods sold and from the beginning retained earnings balance (Entry *G). a. The retained earnings figure being adjusted is that of the original seller. b. If the equity method has been applied and the transfer was made downstream (by the parent), the beginning retained earnings account will be correct; therefore, in this one case, the adjustment is to the Equity in Investment Earnings account. 3. The consolidation process is designed to shift the profit from the period of transfer into the time period in which the goods are actually sold to unrelated parties or consumed D. Effect of deferral process on the valuation of a noncontrolling interest 1. Official accounting pronouncements permit but do not require deferral of unrealized profits on the valuation of noncontrolling interest balances 2. This textbook adjusts the noncontrolling interest balances but only if the sale was made upstream from subsidiary to parent. Downstream sales are made by the parent and, thus, are viewed as having no effect on the outside interest. III. Intra-entity land transfers A. Any gain created by intra-entity land transfers is unrealized and will remain so until the land is sold to an outside party 5-1 Chapter 05 - Consolidated Financial Statements - Intra-Entity Asset Transactions B. For each subsequent consolidation, the recorded value of the land account must be reduced to original cost. The unrealized gain recorded by the seller must also be removed and deferred until the land is sold to an outsider....
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Chap005 Advanced Accounting solution - Chapter 05 -...

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