Notes Ch 5 - Consolidated Financial Statements - Intra-Entity Asset Transactions

Notes Ch 5 - Consolidated Financial Statements - Intra-Entity Asset Transactions

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Unformatted text preview: ACCT 456: C HAPTER 5 N OTES C ONSOLIDATED F INANCIAL S TATEMENTS- I NTERCOMPANY A SSET T RANSACTIONS I NTERCOMPANY INVENTORY TRANSFERS Intercompany transactions are not made with an outside, unrelated party. The sales and purchases balances created by the transfer must be eliminated in the consolidation process (Entry TI) ENTRY TI On the consolidation worksheet, eliminate ALL intercompany sales/purchases of inventory. The elimination amount is the amount assigned as the sales price of the transfer. 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 For consolidation purposes, this intercompany 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). ENTRY G Despite Entry TI, ending inventory is still overstated by the amount of gain on the inventory that is still unsold at year end. We must eliminate the unrealized gain as follows: 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). The retained earnings figure being adjusted is that of the seller . 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 the Earnings of the Subsidiary account. 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 Example Apple Co acquired 90% of Banana Inc on 1 January 2009. The excess payment of $140,000 was allocated to customer contracts (20-year life). Since 1 January 2009 Apple has transferred the following amounts of inventory to Banana: Year Cost Transfer Price On hand at 31 Dec (A) Intercompany Gross Profit Rate (B) Unrealized GP in Inventory at 31 Dec (A) * (B) 2009 $20,000 $50,000 $20,000 @ transfer price 30/50 = 60% $12,000 2010 49,000 70,000 $30,000 @ transfer price 21/70 = 30% $9,000 2011 50,000 100,000 $40,000 @ transfer price 50/100 = 50% $20,000 GP = Sales COGS; GP Rate = GP/Sales Prepare 2009 the consolidation entry to eliminate the intercompany transfer of inventory Entry TI Entry Account Name Debit Credit TI (2009 ) Sales 50,000 COGS 50,000 Compute the amount of gross profit in the unsold inventory at year end. $12,000 Prepare the 2009 consolidation entry required to eliminate the gross profit in the unsold inventory at year end Entry G....
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Notes Ch 5 - Consolidated Financial Statements - Intra-Entity Asset Transactions

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