ACG 4205 - CH 5

In years subsequent to an intra-entity depreciable asset transfer from a subsidiary to its parent (at a gain), Consolidation Entry *TA restores the accumulated depreciation of the transferred asset. In each successive year, the amount of the Consolidation Entry *TA credit to Accumulated Depreciation Blank______.

decreases.

In preparing consolidated financial statements, the gross profit or loss recorded by individual affiliates for intra-entity asset transfers is

excluded from net income. excluded from inventory in the consolidated balance sheet.

Example: Consolidated Entries Cont'd(2) 2019-Upstream

same except subsidiary will charged, not parent

Consistent with the textbook treatment of intra-entity inventory profits, all income effects of intra-entity depreciable asset profits are assigned to the original___ of the asset

seller

Similar to gross profits from intra-entity inventory transfers, the income effect of Consolidation Entries is allocated to the noncontrolling interest for

upstream transfers.

Example

$20,000 would be the sales recognized since that was the amount sold too an outside party. $10,000 would be the COGS recognized since that was the amount Company A purchased from an outside party.

B Company sells land to its parent A Company and records a gain on the sale. In the year of the sale, what accounts must be adjusted in preparing a consolidation worksheet?

The land must be written down to its original cost to the consolidated entity. The gain on sale must be removed.

What is the reason Consolidation Entry *G credits COGS for the intra-entity gross profit present in beginning inventory?

To correct for the overstatement of the beginning inventory component of COGS. Because the credit to COGS increases the net income of the consolidated entity in the year the inventory is sold to outsiders.

How does the direction of intra-entity transfers (resulting in intra-entity gross profit in inventories) affect the computation of the noncontrolling interest's share of consolidated net income

Upstream inventory transfers affect the computation.

Consolidation worksheet entries are not posted to the books of the members of the consolidated group. Therefore, in years subsequent to an upstream intra-entity land sale that records a gain, a consolidation worksheet entry is needed to adjust

the land account. the retained earnings beginning balance for the company that originally recorded the gain on sale of the land.

When the parent applies the equity method and routinely receives upstream inventory transfers from a subsidiary, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to

the subsidiary's retained earnings.

Year-End Intra-Entity Inventory

• Parent is the seller - Downstream • Subsidiary is the seller - Upstream

Back to Intermediate I: Perpetual Inventory System

• Purchased $10,000 of inventory for cash: Inventory 10,000 Cash 10,000 • Sold all of the inventory for $15,000: Cash 15,000 Sales 15,000 Cost of Goods Sold (COGS) 10,000 Inventory 10,000 • Gross Profit = Sales - COGS = 15,000 - 10,000 = 5,000 • Gross Profit % = Gross Profit ÷ Sales = 5,000 ÷ 15,000 = 33%

In years subsequent to an intra-entity depreciable asset transfer from a subsidiary to its parent (at a gain), Consolidation Entry *TA removes the gain from the Retained Earnings account of the seller. In each successive year, the amount of the Consolidation Entry *TA debit to Retained Earnings Blank______.

decreases.

100% of the intra-entity gross profits in beginning inventory are recognized.

does not affect the noncontrolling interest. Only affects NCI if it is an upstream transaction

In the consolidated income statement, the net income attributable to the noncontrolling interest is affected by

excess acquisition-date fair value amortizations. intra-entity gross profits from upstream inventory transfers.

By decreasing COGS, Consolidation Entry *G___ consolidated net income.

increases

Because the individual companies comprising a consolidated entity frequently maintain separate accounting records, the effects of intra-entity inventory transfers

must be identified and removed as part of the process of preparing consolidated financial statements.

(TI)

remove the effects of intra-entity sales and purchases for the consolidated reporting entity.

In the year of an intra-entity depreciable asset transfer at a price in excess of the asset's carrying amount, consolidation entries are needed to

remove the gain on sale from the intra-entity asset transfer.

Example Cont'd: Consolidation Entries (3) 2020-Upstream

same except subsidiary will charged, not parent

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G debits COGS because

the debit to COGS reduces consolidated net income by the amount of the intra-entity gross profit.\ the ending inventory component of COGS is overstated by the intra-entity gross profit remaining at year-end.

When a parent applies the equity method and upstream intra-entity gross profits exist in the beginning inventory, the debit to the subsidiary's Retained Earnings account in Consolidated Entry S ______ Consolidation Entry *G.

will decrease by the debit to the subsidiary's Retained Earnings account in

When intra-entity gross profits from upstream sales are present in beginning inventory, which of the following describes the effect on consolidated statements?

The net income effect of the intra-entity inventory gross profit is transferred from the prior period to the current period. Consolidation Entry *G credits COGS which increases current period's consolidated net income.

In the year of an intra-entity land transfer resulting in the recording of a gain, a consolidation entry is needed to

ensure the gain is not reported in the consolidated income statement. write-down the value of the land by the amount of the intra-entity gain.

The accounting effects of inventory sales across companies within a consolidated entity are removed when preparing consolidated financial statements because

intra-entity inventory transfers create no net change in the financial position of the consolidated reporting entity. from a consolidated perspective, neither a sale nor a purchase has occurred. consolidated statements reflect only transactions with outside parties.

Consolidation Entry G credits COGS in the year following transfer because the beginning inventory component of COGS is

overstated by the intra-entity gross profit.

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry ED

reduced accumulated depreciation for the current year's overstatement of depreciation expense. removes the overstatement of expense resulting from depreciating the inflated transfer price of the transferred asset.

Because consolidation worksheet entries are not posted to any affiliate's individual accounting records, intra-entity ending inventory gross profits from the previous year appear in the subsequent year's beginning inventory of the affiliate who now possesses the inventory. To correct for the presence of intra-entity gross profits in beginning inventory, Consolidation Entry *G

reduces COGS.

If the parent uses the initial value method for its internal investment accounting, in consolidation adjustments are needed to Blank______.

reflect a full accrual basis in the consolidated financial statements.

In the year of an intra-entity depreciable asset transfer at a price in excess of the asset's carrying amount, consolidation entries are needed to

remove the gain on sale from the intra-entity asset transfer. remove the effect of the intra-entity gain on depreciation expense return the asset to its historical cost to the consolidated entity.

When intra-entity gross profits exist in a parent company's beginning inventory, the current year consolidated worksheet should contain an entry to

remove the intra-entity gross profit from the seller's beginning retained earnings.

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry TA

restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity's books.

In the year of an intra-entity asset transfer at a price in excess of the asset's carrying amount, Consolidation Entry TA

restores the amount of accumulated depreciation removed when the sale was recorded on the selling entity's books. ensures the exclusion of the intra-entity gain in the consolidated income statement. restores the historical cost balance for the transferred asset.

When the parent applies the equity method and routinely transfers inventory downstream, Consolidation Entry *G involves a credit to COGS to recognize the intra-entity gross profit in beginning inventory and a debit to

the Investment in Subsidiary account.

When a parent sells land to its subsidiary at a profit, what is the effect on the noncontrolling interest.

No effect

True or false: In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry ED debits Accumulated Depreciation and credits Depreciation Expense for the current year's portion of the intra-entity gain on sale.

True; Reason: Note in the example the original $30,000 gain divided by 10 years equals the depreciation expense adjustment in Consolidation Entry ED.

How does the direction of intra-entity land transfers (resulting in intra-entity gain on sale) affect the computation of the noncontrolling interest's share of consolidated net income?

Upstream land transfers affect the computation.

In periods subsequent to an intra-entity depreciable asset transfer (at a gain), Consolidation Entry *TA is modified when the parent applies the equity method and the transfer was downstream. The modification replaces the adjustment to the parent's retained earnings with an adjustment to the Investment in Subsidiary account because Blank______.

the equity method has already reduced the parent's retained earnings for the intra-equity gain. the debit to the Investment in Subsidiary account is needed to bring that account to zero in consolidation.

Example Cont'd: Consolidation Entries (3) 2020-Downstream

18,000= gain on sale 1,000= extra accumulated depreciation

In the presence of a 10% noncontrolling interest, how much intra-entity gross profit remaining in ending inventory should be eliminated in consolidation?

100%

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in beginning inventories from downstream sales to an 80% owned affiliate?

100% of the intra-entity gross profits in beginning inventory are recognized.

Analysis (2)

2020 Gross Profit %: $20,000 ÷ $80,000 = 25% 2021 Gross Profit %: $30,000 ÷ $100,000 = 30% Gross profit in 2020 ending inventory = 25% x 16,000 = $4,000 Gross profit in 2021 beginning inventory = 25% x 16,000 = $4,000 2021 Intra-Entity Sale = $100,000 Gross profit in 2021 ending inventory = 30% x $20,000 = $6,000

The Problem

6,000 = 108,000 / 18 years (building was sold to company B in year 2, must adjust depreciation to account for 20 years- 2 years)

When intra-entity transfers of depreciable assets occur, what are the financial reporting objectives in preparing consolidated financial statements?

Re-establish historical cost balances for the transferred assets. Defer intra-entity gains from intra-entity depreciable asset sales Recognize appropriate income effects from the sale and use of intra-entity transferred assets.

How does the equity method adjust the parent's Equity in Earnings account for intra-entity gross profits in ending inventory from upstream sales to an 80% owned affiliate?

80% of the intra-entity gross profits in ending inventory are deferred.

Downstream ex. (*1)

Accumulated depreciation = difference between book value and cost Gain is calculated last Parent depreciation = book vale / 5 years Sub depreciation: amount paid for equipment / 5 years

How does the ASC describe the effect of intra-entity gross profit remaining in ending inventory on the noncontrolling interest?

Any intra-entity income or loss may be allocated between the parent and noncontrolling interest.

When an intra-entity sale of a depreciable asset occurs at a price in excess of the asset's carrying amount, which of the following result from a consolidated entity perspective?

Retained earnings of the selling affiliate become overstated. Depreciation expense becomes overstated. The carrying amount of the asset becomes overstated by the amount of the intra-entity gain.

After combining the individually recorded revenues of a parent and subsidiary, what is the effect on consolidated revenues of intra-entity inventory transfers?

Revenues from intra-entity transfers are not included in consolidated revenues.

How do gross profits resulting from upstream inventory transfers affect the computation of consolidated net income attributable to the noncontrolling interest?

Beginning inventory gross profits increase the noncontrolling interest's share of consolidated net income. Ending inventory gross profits decrease the noncontrolling interest's share of consolidated net income.

Downstream and Upstream

Downstream> the Parent is the seller; Parent's income adjusted for elimination of gross profits. • Upstream> the Subsidiary is the seller; Subsidiary's income adjusted for elimination of gross profits.

Downstream ex. (2)

Eliminate gain, add back accumulated depreciation, and deduct equipment from 200,00 back to 180,000 Excess depreciation eliminated (2nd entry)

In preparing consolidated financial statements when intra-entity gross profits remain in ending inventory, Consolidation Entry G credits Inventory because

From a consolidated perspective, the account is overstated by the amount of the intra-entity gross profit remaining in ending inventory.

Which of the following Consolidation Entries has the net effect of decreasing the current period's consolidated net income?

G Reason: Consolidation Entry TI both increases and decreases consolidated net income by the same amount thus producing a zero net effect.

When land is sold at a gain across members of a consolidated group, in years subsequent to the land sale, where does the gain reside?

In the seller's retained earnings account and the buyer's land account.

If Intercompany inventory is still on hand (2)

Must eliminate gross profit in the ending inventory

When the parent applies the equity method and routinely transfers inventory downstream, which of the following consolidation entries are sometimes needed to bring the Investment in Subsidiary account to a zero balance?

(D) for the parent's share of subsidiary dividends declared. (I) for the equity in subsidiary earnings recognized by the parent. (*G) for intra-entity gross profits in beginning inventory.

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income?

*G (Decreasing COGS aka a credit to COGS increases net income)

Which of the following Consolidation Entries has the net effect of increasing the current period's consolidated net income?

*G Reason: the debit to COGS in in consolidation entry G decreases consolidated net income.

Consolidation Entry TL removes the gain on sale from an intra-entity land sale because the land remains under the control of the consolidated entity.

T; Only sales to firms outside the consolidated entity qualify for gain recognition in the consolidated financial statement.

True or false: Intra-entity inventory profits resulting from upstream transfers affect the consolidated net income allocation to both the controlling and noncontrolling interests.

T; Reason: Intra-entity inventory profits resulting from upstream transfers result from the subsidiary's selling activities thus affecting the noncontrolling owners of the subsidiary.

Compared to the equity method, when the parent uses the initial value method, which consolidation entries for intra-entity transfers may differ or additionally be included?

The Consolidation Entry (*G) to recognize the intra-entity profit in beginning inventory. The Conversion Entry (*C).

How does Consolidation Entry *GL differ when an intra-entity gain resulted from downstream land transfers and the parent uses the equity method for its investment in its subsidiary?

The Investment in Subsidiary account is debited instead of the parent's Retained Earnings account.

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following *TA adjustments remains constant over the remaining life of the asset?

The asset account

As part of Consolidation Entry S, the debit to the subsidiary's RE is reduced due to intra-entity gross profits in beginning inventory. What effect does this reduction have on the beginning-of-the-year balance of the noncontrolling interest?

The beginning balance of the noncontrolling interest is entered as a smaller amount.

Intra-entity gross profits in ending inventory are recognized in consolidated net income though a credit to COGS when the inventory is sold to outsiders. As a intra-entity transferred asset is used in the production process, the intra-entity gain is recognized in consolidated net income by consolidation entries that credit___

depreciation expense

Company A accounts for its investment in subsidiary using the equity method. Company B uses the initial value method. Both companies have intra-entity gross profits in their consolidated inventories from downstream sales. Comparing Exhibits 5.7 and 5.4 shows ___difference in consolidated totals resulting from the investment accounting (equity vs. initial value) method choice.

no

Inventory transfers among affiliates within a consolidated entity

produce accounting effects that are eliminated in the preparation of consolidated financial statements. create neither profits nor losses to the consolidated entity.

Intra-entity gross profits in beginning inventory require adjustment in the current consolidation worksheet because the previous year's consolidation entries are never ___ to the individual affiliates' books.

recorded

A parent uses the initial value method, sells inventory to the subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of Consolidation Entry *G on the consolidated financial statements?

Net income is reassigned from the previous year to the current year.

If Intercompany inventory is still on hand

Book value of ending inventory = $15,000 (Inventory in Company B) Value of ending inventory = $10,000 that Company A purchased the items for Culprit= Gross profit from intra-entity sale

A parent uses the initial value method, sells inventory to the subsidiary, and intra-entity gross profits exist in beginning inventory. What is the effect of the intra-entity gross profits in beginning inventory on Consolidation Entry *G?

Both COGS and the parent's RE are decreased. Credit to COGS= decrease Debot to Paren'ts RE= debit

In period's subsequent to a depreciable asset transfer (gain recorded) from a subsidiary to its parent, which of the following individual affiliate accounts continue to be misstated from a consolidated perspective?

Retained earnings of the selling affiliate. Depreciation expense. Accumulated depreciation.

Example cont'd

Must eliminate the intra-entity sale