Chapter Five

1
Chapter Five
Intercompany Asset Transactions
A sells 20 units to B
B sells 20 units to customers
Sales 20 x 13 CGS 20 x 10
Sales 20 x 11 CGS 20 x 10
Sales 20 x 13 CGS 20 x 11
Subtract
Subtract
Sales 20 x 11
CGS 20 x 11
2
A sells 20 units to B
B sells 15 units to customers
Sales 15 x 13 CGS 15 x 10 Invnt 5 x 10
Sales 20 x 11 CGS 20 x 10
Sales 15 x 13 CGS 15 x 11 Invnt 5 x 11
Subtract
Subtract
Sales 20 x 11 CGS 5 x 11
CGS 15 x 11
Add
Subtract
CGS 5 x 1
Invnt 5 x 1
3
Prob 5-32
60
How Tall calculates equity earnings of Short
Reported income - Short 40,000 Recog prior yr
unreal gain 5,000 Defer current yr unreal gain
(10,000) Total 35,000 Parents share
(60) 21,000 Extra amortiz (11,000) Equity
earnings of Short 10,000
4
Entry (G) R/E, 1/1/04 5,000 CGS 5,000
To recognize unrealized gain in beginning
inventory.
Entry (S) R/E, 1/1/04 (adj) 345,000 Common
Stock 90,000 Add Pd-in cap 60,000 Invst in
Short 297,000 NC int sub 1/1/04 198,000
5
Entry (A) Equipment 56,000 Buildings 36,000 Da
tabase 56,000 Invst in Short 148,000
Equipment 70,000 2 x 7,000 Buildings 40,000 2
x 2,000 Database 60,000 2 x 2,000
60
6
Entry (I) Equity earn of Short 10,000 Invst
in Short 10,000
Entry (D) Invst in Short 15,000 Dividends
Paid 15,000
7
Entry (E) Oper Exp (deprec) 9,000 Amortiz
Expense 2,000 Equipment 7,000 Buildings 2,00
0 Database 2,000
Entry (P) Liabilities 30,000 Receivables 30,0
00
8
Entry (TI) Revenues 140,000 CGS 140,000
To eliminate intercompany inventory transfers (as
if all of it had been sold).
Entry (G) CGS 10,000 Inventory 10,000
To eliminate unrealized gain in ending inventory.
9
Noncontrolling Interest Entry NCint in Short
Income 14,000 NC int Short 1/1/04 198,000 Divid
ends Paid 10,000 NC int in Short 12/31 202,000
40 x 35,000
Reported income - Short 40,000 Recog prior yr
unreal gain 5,000 Defer current yr unreal gain
(10,000) Total 35,000
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Upstream Sale
Downstream Sale

• Entry G adjusts subs beginning R/E.
• Entry S reflects this adjustment.
• Entries G G adjusts subs current income.
• Entries C, I, and NCI reflect this adjustment.

• Entry G adjusts parents beginning R/E.
• Entry S is unaffected.
• Entries G G adjusts parents current income.
• Entries C, I, and NCI are unaffected.

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Downstream 5,000 5,000
Entry (G)
Upstream R/E, 1/1/04 5,000 CGS 5,000
Beg R/E of subsidiary.
Beg R/E of parent.
NOTE For purposes of this class, assume G is
always this entry.
12
Downstream 350,000 90,000 60,000 300,0
00 200,000
Entry (S)
Upsteam R/E, 1/1/04 345,000 Common
Stock 90,000 Add Pd-in cap 60,000 Invst in
Short 297,000 NC int sub 1/1/04 198,000
When sale is upstream, beg R/E of sub reflects
adjustment.
13
Downstream 13,000 13,000
Entry (I)
Upstream Equity earn of Short 10,000 Invst in
Short 10,000
Reported income - Short 40,000 Recog prior yr
unreal gain 5,000 Defer current yr unreal gain
(10,000) Total 35,000 Parents share
(60) 21,000 Extra amortiz (11,000) Equity
earnings of Short 10,000
40,000 . 40,000 24,000
(11,000) 13,000
NOTE There are different approaches to recording
unrealized gains on downstream sales. Regardless
of approach, consolidated totals will be the same.
14
Downstream 16,000 200,000 10,000 206,
000
Noncontrolling Interest Entry
Upstream NCint in Short
inc. 14,000 NCint Short 1/1/04 198,000 Dividends
Paid 10,000 NCint Short 12/31 202,000
40 x 35,000
40 x 40,000
Reported income - Short 40,000 Recog prior yr
unreal gain 5,000 Defer current yr unreal gain
(10,000) Total 35,000
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Intercompany Transfer of Depreciable Assets
Prob 5-25 Sale of Building
Individual Consolid Worksheet Records Perspect A
djustments
Asset Transfer Equipment 50,000 70,000
20,000 Accum Deprec 0 (40,000) (40,000) Gain on
Sale (20,000) 0 20,000
Entry (TA) Equipment 20,000 Gain on Sale -
Equip 20,000 Accum Deprec 40,000
Affects sub income on upstream sale.
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Individual Consolid Worksheet Records Perspect A
djustments
During 2003 Accum Deprec (10,000) (6,000) 4,000 De
prec Exp 10,000 6,000 (4,000)
Entry (ED) Accum Deprec 4,000 Deprec
Exp. 4,000
Affects sub income on downstream sale.
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Individual Consolid Worksheet Records Perspect A
djustments
Start of 2004 Equipment 50,000 70,000
20,000 Accum Deprec (10,000) (46,000) (36,000) R/E
effect - seller (20,000) 0 20,000 R/E effect -
buyer 10,000 6,000 (4,000)
Entry (TA) Equipment 20,000 R/E, 1/1
(seller) 20,000 R/E, 1/1 (buyer) 4,000 Accum
Deprec 36,000
One of these will affect Entry (S).
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Individual Consolid Worksheet Records Perspect A
djustments
Start of 2004 Equipment 50,000 70,000
20,000 Accum Deprec (10,000) (46,000) (36,000) R/E
effect - seller (20,000) 0 20,000 R/E effect -
buyer 10,000 6,000 (4,000)
Start of 2005 Equipment 50,000 70,000
20,000 Accum Deprec (20,000) (52,000) (32,000) R/E
effect - seller (20,000) 0 20,000 R/E effect -
buyer 20,000 12,000 (8,000)
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Individual Consolid Worksheet Records Perspect A
djustments
During 2004 Accum Deprec (10,000) (6,000) 4,000 De
prec Exp 10,000 6,000 (4,000)
Entry (ED) Accum Deprec 4,000 Deprec
Exp. 4,000