Chapter 5 - Consolidated F/S - Intra-Entity Asset Transactions

For Down-Stream Land Transfer

In year 1 when original transfer occurs a subtraction to PareCo's Equity in SubCo's NI at 100% In year 3, (land sold externally) the gain is added back at 100% No adjustment in either year to NCI's Equity in SubCo's NI

For Up-Stream Land Transfer

In year 1 when original transfer occurs a subtraction to PareCo's Equity in SubCo's NI at 70% In year 3, (land sold externally) the gain is added back at 70% ------------ In year 1 when original transfer occurs a subtraction to NCI's Equity in SubCo's NI at 30% In year 3, (land sold externally) the gain is added back at 30%

Inventory Reported at Original Cost

Inventory on hand (leftover 20%) * Cost percentage (Parent's CGS/Parent's Sales) =Inventory Original Cost

Up-Stream Inventory Sale (S to P) in Both Years

PareCo's Equity in SubCo's NI: Year 1: Subtract 70% of Deferred GP Year 2: Add 70% of Deferred GP NCI's Equity in SubCo's NI: Year 1: Subtract 30% of Deferred GP Year 2: Add 30% of Deferred GP

Down-Stream Inventory Sale (P to S) in Both Years

PareCo's Equity in SubCo's NI: Year 1: Subtract Deferred GP Year 2: Add Deferred GP NCI's Equity in SubCo's NI: Year 1: No adjustment Year 2: No adjustment

True Gross Profit

Sales Sub's Revenue Less Parent's CGS * sold percent) =Gross profit

Entry TI and G

Taken together, consolidation entries (TI) and (G) negate the intra-company sale returning the inventory to its original cost

Gross Profit Precent

The amount of inventory left over after sale * (original amount of cash paid - original CGS for parent) / original amount of cash paid

Entry G:

This entry removes the unrealized gross profit from ending inventory

Upstream

To parent from sub

When Remaining Inventory Sold in Year 2 Upstream

*G Entry Dr. Retained Earnings (SubCo) Cr. CGS

When Remaining Inventory Sold in Year 2 Downstream

*G for the deferred gross profit in Entry G Dr. Equity Investment in SubCo Cr. CGS

Upstream Summary

1) From Sub to the Parent 2) Sale at marked-up valuation -Increases Sub's revenues and NI -Affects Parent's share of CNI -Affects NCI's share on CNI

Downstream Summary

1) From parent to Sub 2) Sale at marked up valuation -Increases Parent's Revenue and NI -No affect on sub's NI -No affect on NCI share of CNI

Transfer of Land - Equity Method

1) In land sales, the unrealized gain must be deferred until the land is again sold to third-party. In the year of the sale, entry (TL) will be used to eliminate any gain or loss on intra-company sale of land. 2) In each subsequent year, the deferred gain will be eliminated again either the parent's Investment or the Sub's RE using entry (*GL), depending on whether the original transfer was DS or US 3) When the land is finally transferred outside of the consolidate entity, the actual gain or loss on sale will be realized and assigned to the parent, or the parent and the sub depending on whether the original transfer was DS or US

Transfers of Depreciable or Amortizable Assets

1) In transfers of depreciable or amortizable assets, the unrealized gain is deferred, but is eliminated by excess depreciation (amort) over the life of the asset. In the year of the sale, entry (TA) will be used to eliminate any gain (loss) or intra-company sale of the asset. Any addition to (reduction in) depreciation or amortization because of the intra-company sale above (below) book value will be recorded using entry (ED) 2) While the adjustment for depreciation (amort) is constant over the life of the asset, the subsequent years' adjustments to the Net Asset (entry *TA) varies with each succeeding consolidation

Up-Stream

1) Increases, Sub's Revenue, NI, and RE 2) Affects Parent's share of CNI 3) Affects NCI's share of CNI 4) *G Entry will adjust: -S's RE and S's CGS to recognize GP deferred to the 2nd year as earned 5) *GL Entry will Adjust: S's RE and P's Land To remove the deferred gain until outside sale 6) *TA Entry will adjust: -S's RE and P's Net Asset To remove the unamortized deferred gain until outside sale

Sub Sales only % of Inventory from Parent

1) TI Dr. Sales Cr. CGS 2) G (Must be what's left * Gross profit percent) Dr. CGS Cr. Inventory

Downstream but Sub holds all inventory at the end

1) TI Dr. Sales (for the cash amount received) Cr. CGS 2) G Dr. CGS (difference between what Sub paid and the CGS PareCo sold) Cr. Inventory

Entry TI and G Allow:

1) The external sale to be reported at its true gross profit 2) Inventory to be reported at its original cost

Entry TI

1) The removal of the sale/purchase is the 1st in a series of consolidation entries necessitated by interest transfers. 2) The total recorded intra-entity sales figure is deleted regardless of whether the transaction was downstream or upstream. 3) Elimination of the intra-entity sale allows the external sale to be reported at the current gross profit

Intra-Entity Transactions

1) Transcations between a parent and sub are considered "internal" transactions of a single entity. 2) Effects of intra-entity transactions must be eliminated from the consolidated F/S. 3) Consolidated statements must reflect only transactions with outside parties.

Down-Stream

1) increases parent's Revenue, NI, and RE 2) No affect on Subs NI or RE 3) No affect on NCI share of CNI 4) *G Entry will adjust: -P's RE and P's CGS to recognize GP deferred to the 2nd year as earned 5) *GL Entry will adjust -P's RE and S's Land To remove the deferred gain until outside sale 6) *TA Entry wil adjust: -P's RE and S's Net Asset To remove the unamortized deferred gain until outside sale

Entry ED- Year 1

DR. Equipment, net Cr. Depreciation Expense

Entry TA- Year 1

DR. Gain on the sale of the equipment Cr. Equipment, Net

Entry *G Downstream

Decrease consolidated CGS in Year 2, which will increase consolidated NI (parent's share) for Year 2. Because the parent's share of consolidated net income is increasing, we must also reflect this increase in the parent's investment account (part of the adjustment to remove the investment account in the consolidation process).

Entry *G Upstream

Decreases consolidate CGS in Year 2, which will increase CNI for Year 2. Because the original sale was up-stream and recorded in SubCo's accounting records, SubCo's beginning Retained Earnings are overstated.

Entry ED-Year 2

Dr. Equipment, net Cr. Depreciation Expense

Entry ED-Year 3

Dr. Equipment, net Cr. Depreciation Expense

Entry *TA-Year 2

Dr. Investment (PareCo - Down) / RE (SubCo - Up) Cr. Equipment, net

Entry *TA-Year 3

Dr. Investment (PareCo - Down) / RE (SubCo - Up) Cr. Equipment, net

*GL Entry (Selling the Land Externally)

Dr. Investment (PareCo-Down) / RE (SubCo-Up) Cr. Gain of Sale of Land ****Original gain from internal transfer*****

*GL Entry

Dr. Investment (PareCo-Down) / RE (SubCo-Up) Cr. Land

Consolidation Entry (TI)

Dr. Sales (for the cash amount received) Cr. CGS

Downstream

From parent to sub

TL Entry

Gain on the original sale of land Dr. Gain on Sale of Land Cr. Land

Down-Stream P to S - Depreciable Assets

Year 1 PareCo will subtract the 135,000 from NI Year 2 PareCo will add 15,000 (100% of depreciation to NI) Year 3 PareCo will add 15,000 (100% of depreciation to NI)

Up-Stream S to P - Depreciable Assets

year 1 subtract 94,500 (70% of gain) from PareCo NI and 30% from NCI's NI Year 2 Add 70% of depreciation to PareCo's NI and 30% to NCI's NI Year 3 same as above