Acct 555 Exam 2 (Chapter 5)

Net Income Attributable to the NCI

When intra-entity transfers are downstream, deferred intra-entity gross profits relate solely to the parent company and have no effect on the subsidiary or outside ownership. The noncontrolling interest's share of consolidated net income is unaffected by the downstream intra-entity profit deferral and subsequent recognition.

Intra-Entity transaction- upstream inventory transfers

A different set of consolidation procedures is necessary if the intra-entity transfers are upstream. Upstream gross profits are attributed to the subsidiary (Bottom) not the parent (Top). Because the intra-entity sales are upstream, the $4,000 beginning intra-entity gross profit (Entry *G) deferral no longer involves a debit to the parent's Investment in Bottom account.

Downstream fixed asset transfer - additional issues

Downstream sales are assumed to have no effect on any noncontrolling interest values. The parent rather than the subsidiary made the sale. The impact on net income created by upstream sales must be considered in computing the balances attributed to these outside owners. Many acceptable alternatives exist for assignment of income created within a consolidation process. The textbook choses to assign all income to the original seller.

Land transfers - nci

If the original sale was a DOWNSTREAM transaction, it has no effect on the noncontrolling interest. If the transfer is made UPSTREAM, it is attributed to the subsidiary and the noncontrolling interest. All noncontrolling interest balances are computed on the reported earnings of the subsidiary after adjustment for any upstream transfers.

Fixed assets transfer - subsequent years

The intra-entity gain and excess depreciation expense remain on the separate books and are closed into Retained Earnings of the respective companies at year- end. Equipment is carried on the individual books at a different amount than on the consolidated books. The amounts change each year as depreciation is computed. For every subsequent period, separately reported figures must be adjusted on the worksheet to present the consolidated totals from a single entity's perspective.

-What to do with intra-entity inventory transaction; When we have intra-entity inventory transactions between parent and subsidiaries

1. Entry TI to remove internal sales and internal COGS (Assumption: as if the entire internal sales has been disposed/sold to an unrelated party). 2. When there is actual left over at the end of the preriod: defer that portion of the gross profit. Calculation exactly like we did in equity method. 3. Entry G to remove the amount from Inventory, and increase COGS. 4. The period after, *G needs to be included to bring the deferred gross profit into current statement: - If downstream and equity method: Dr. Investment to sub, Cr. COGS - Otherwise: Dr. R/E of sub, Cr. COGS 5. Presence of NCI does not change the calculation for deferral, only changes how much income is assigned to controlling interest and NCI, when it is upstream.

unrealized gross profit - effect on NCI

According to FASB ASC paragraph 810-10-45-6: Amount of intra-entity profit or loss to be eliminated is not affected by the existence of a noncontrolling interest. Complete elimination of the intra-entity profit or loss is consistent with the underlying assumption that consolidated financial statements represent the financial position and operating results of a single economic entity. Elimination of the intra-entity profit or loss may be allocated proportionately between the parent and noncontrolling interests.

consolidated accounts affected by intra-entity inventory transfers

Accounts affected by intra-entity transactions: Revenues Cost of Goods Sold Net Income Attributable to the Noncontrolling Interest Retained Earnings at the Beginning of the Year Inventory Noncontrolling Interest in Subsidiary at End of Year

Land Transfers

Consolidation procedures for intra-entity land transfers partially parallel those for the events occurring in an intra-entity inventory transfer. The worksheet process must adjust the account balances as a single economic entity. The sequence of events in an intra-entity land sale: 1) The original seller of the land reports a gain (or loss), even though the transaction occurred between related parties. The acquiring company capitalizes the inflated transfer price 2) The gain recorded by the seller is closed into Retained Earnings at the end of the year. As a consolidated entity, the account is artificially increased by a related party. The buyer's Land account and the seller's Retained Earnings account continue to contain the intra-entity gain. 3) The gain on the original transfer is recognized in consolidated net income only when the land is subsequently disposed of to an outside party. Appropriate consolidation techniques must eliminate the intra-entity gain each period until the time of resale.

Deferral of intra-entity gains - fixed assets

Financial reporting objectives remain unchanged for intra- entity sales of depreciable assets: Defer intra-entity gains. Re-establish historical cost balances. Recognize appropriate income within the consolidated financial statements. Defer gains created by intra-entity transfers until the subsequent use or resale of the asset consummates the original transaction.

Effects of Alternative investment methods on consolidation

If the parent uses either the initial value or the partial equity method, many of the consolidation procedures are identical to those used in the equity method except for two. Consolidation entry *C is required in periods subsequent to acquisition to convert the parent's beginning Retained Earnings to a full-accrual consolidated total. Consolidation entry *G corrects the overstatement in the subsidiary's beginning Retained Earnings and appropriately recognizes the profit in the current year.

Downstream fixed aset transfer - subsequent years

If the transfer is downstream and the parent uses the equity method, then their Retained Earnings balance has already been reduced for the gain, and we adjust the Investment account instead. The following worksheet consolidation entries would be made for a downstream sale assuming that: 1) Able is the parent. 2) Able has applied the equity method to account for its investment in Baker.

Intra-Entity Beginning inventory profit adjustment- downstream sales when parent uses equity method

Worksheet Entry TI and Entry G are standard, regardless of the circumstances of the consolidation, but Entry *G differs. IF: 1) The original transfer is downstream (parent's) AND 2) The parent applies the equity method for internal accounting purposes THEN: Investment in Subsidiary account replaces parent's beginning Retained Earnings in consolidation entry *G.

Land Transfers - downstream vs upstream

The reduction in Retained Earnings is changed to an increase in the Investment in Subsidiary account when the original sale is downstream and the parent has applied the equity method. In that situation, equity method adjustments have already corrected the timing of the parent's intra-entity gain, which has created a reduction in the Investment account that is appropriately allocated to the subsidiary's Land account on the worksheet. Conversely, if sales were upstream, the Retained Earnings of the seller (the subsidiary) continue to be overstated even if the parent applies the equity method.

Land Transfers - slae to outside party

When the company eventually sells the land to an outsider, it must recognize the gain deferred at the time of the original transfer. On the worksheet, the gain is removed one last time from beginning Retained Earnings (or the investment account, if applicable). In this instance, though, the worksheet entry reclassifies the amount as a recognized gain.