Pearson Education, Inc. publishing as Prentice Hall6-*Chapter 6: Intercompany Profit Transactions Plant Assetsby Jeanne M. David, Ph.D., Univ. of Detroit Mercy

to accompany Advanced Accounting, 10th editionby Floyd A. Beams, Robin P. Clement, Joseph H. Anthony, and Suzanne Lowensohn

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Pearson Education, Inc. publishing as Prentice Hall6-*Intercompany Profits Plant Assets: ObjectivesAssess the impact of intercompany profit on transfers of plant assets in preparing consolidations working papers.Defer unrealized profits on asset transfers by either the parent or subsidiary.Recognize realized, previously deferred profits on asset transfers by the parent or subsidiary.Adjust the calculation of noncontrolling interest amounts in the presence of intercompany profits on asset transfers.

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Pearson Education, Inc. publishing as Prentice Hall6-*1: Transfers of Plant AssetsIntercompany Profit Transactions Plant Assets

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Pearson Education, Inc. publishing as Prentice Hall6-*Intercompany Fixed Asset SalesIntercompany sales of nondepreciable fixed assets:In year of intercompany saleDefer any gain or lossRestate fixed asset to costIn years of continued ownershipAdjust investment account to defer gain or loss (adjust noncontrolling interest too, if upstream sale)Restate fixed asset to costIn year of sale to outside entityAdjust investment account (and noncontrolling interest if upstream sale)Recognize the previously deferred gain or loss

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Pearson Education, Inc. publishing as Prentice Hall6-*Intercompany Sale of LandPark owns 90% of Stan, acquired at cost equal to fair value. In 2009, Park sells (downstream) land to Stan and records a $10 gain. In 2013, Stan sells the land to an outside entity at a $15 gain. Stan's separate income was $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

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Pearson Education, Inc. publishing as Prentice Hall6-*2009 CalculationsDefer the unrealized gain, with full effect to ParkPark's Income from Stan90%(70) 10 = $53Noncontrolling interest share10%(70) = $7Elimination entry for 2009 Worksheet

Gain on sale of land10 Land10

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Pearson Education, Inc. publishing as Prentice Hall6-*2010 to 2012 CalculationsContinue to defer gain, with full effect to ParkPark's Income from Stan90%(80) = $72Noncontrolling interest share10%(80) = $8Elimination entry for Worksheets in 2010 to 2012

Investment in Stan10 Land10

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Pearson Education, Inc. publishing as Prentice Hall6-*2013 CalculationsRecognize the previously deferred gain, with full effect to ParkPark's Income from Stan90%(90) + 10 = $91Noncontrolling interest share10%(90) = $9Elimination entry for 2013 Worksheet

Investment in Stan10 Gain on sale of land10

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Pearson Education, Inc. publishing as Prentice Hall6-*2: Deferring Unrealized ProfitsIntercompany Profit Transactions Plant Assets

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Pearson Education, Inc. publishing as Prentice Hall6-*Unrealized Profits on Fixed AssetsUnrealized profit or loss on nondepreciable fixed assetsDefer in year of intercompany saleContinue deferring by adjusting the investment in subsidiary (and noncontrolling interest if upstream)Recognize full profit or loss upon resale to outside entity

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Pearson Education, Inc. publishing as Prentice Hall6-*Depreciable Fixed AssetsGains and losses on intercompany sales of depreciable fixed assetsDefer in period of intercompany saleRecognize gain or loss over remaining life of asset Adjust asset and depreciation down for gainsAdjust asset and depreciation up for lossesRecognize any unamortized gain or loss upon sale to outside entity

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Pearson Education, Inc. publishing as Prentice Hall6-*Downstream ExamplePerry owns 80% of Soper, acquired at cost equal to fair value. On 1/1/09, Perry sells equipment to Soper at a $30 profit. The equipment has a remaining life of 5 years from 1/1/09. Soper disposes of the equipment at book value at the end of 5 years. Soper's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

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Pearson Education, Inc. publishing as Prentice Hall6-*2009 CalculationsDefer the unrealized gain and amortize it over 5 years with full effect to Perry30 gain / 5 years = $6Perry's Income from Soper80%(70) 30 + 6 = $32Noncontrolling interest share20%(70) = $14Elimination entry for 2009 Worksheet

Gain on sale of equipment30 Equipment30Accumulated depreciation6Depreciation expense6

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Pearson Education, Inc. publishing as Prentice Hall6-*3: Recognizing Realized, Previously Deferred ProfitsIntercompany Profit Transactions Plant Assets

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Pearson Education, Inc. publishing as Prentice Hall6-*Previously Deferred Gains/LossesRecognize over the life of the depreciable assetDownstream salesAdjust investment in subsidiary accountUpstream salesAdjust investment in subsidiary account and noncontrolling interest, proportionatelyIntercompany sales at a gainAdjust asset and depreciation downIntercompany sales at a lossAdjust asset and depreciation up

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Pearson Education, Inc. publishing as Prentice Hall6-*2010 to 2012 CalculationsContinue to recognize part of the gain, with full effect to PerryPerry's Income from Soper80%(80) + 6 = $70Noncontrolling interest share20%(80) = $16Elimination entry for Worksheets in 2010

Investment in Soper24 Accumulated depreciation6Equipment30Accumulated depreciation6Depreciation expense6

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Pearson Education, Inc. publishing as Prentice Hall6-*Entries (cont.)Worksheet entries for 2011

Worksheet entries for 2012

Investment in Soper18 Accumulated depreciation12Equipment30Accumulated depreciation6Depreciation expense6

Investment in Soper12 Accumulated depreciation18Equipment30Accumulated depreciation6Depreciation expense6

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Pearson Education, Inc. publishing as Prentice Hall6-*2013 CalculationsRecognize the remaining deferred gain, with full effect to PerryPerry's Income from Soper80%(90) + 6 = $78Noncontrolling interest share20%(90) = $18Elimination entries for 2013 Worksheet

Investment in Soper6 Accumulated depreciation24Equipment30Accumulated depreciation6Depreciation expense6

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Pearson Education, Inc. publishing as Prentice Hall6-*4: Impact on Noncontrolling InterestIntercompany Profit Transactions Plant Assets

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Pearson Education, Inc. publishing as Prentice Hall6-*Sharing Unrealized Gain or LossUpstream sales of fixed assets require:Deferring the gain or loss on the saleRecognizing a portion of the gain or loss as the asset depreciatesWriting off any unrecognized gain or loss upon the sale of the assetSharing the gains and losses between the controlling and noncontrolling interestsUpstream sales impact noncontrolling interests!

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Pearson Education, Inc. publishing as Prentice Hall6-*Upstream ExamplePail owns 70% of Shovel, acquired at cost equal to fair value. On 1/1/09, Shovel sells equipment to Pail at a $40 profit. The equipment has a remaining life of 5 years from 1/1/09. Pail Uses the equipment for four years, then sells it at a profit at the start of 2013. Shovel's income is $70 in 2009, $80 per year for 2010 to 2012, and $90 in 2013.

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Pearson Education, Inc. publishing as Prentice Hall6-*2009 CalculationsDefer the unrealized gain and amortize it over 5 years sharing the gain40 gain / 5 years = $8Pail's Income from Shovel70%(70 40 + 8) = $26.6Noncontrolling interest share30%(70 40 + 8) = $11.4Elimination entry for 2009 Worksheet

Gain on sale of equipment40 Equipment40Accumulated depreciation8Depreciation expense8

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Pearson Education, Inc. publishing as Prentice Hall6-*2010 to 2012 CalculationsContinue to recognize part of the gain, sharing its effect between the controlling and noncontrolling interestsPail's Income from Shovel70%(80 + 8) = $61.6Noncontrolling interest share30%(80 + 8) = $26.4

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Pearson Education, Inc. publishing as Prentice Hall6-*2010 Worksheet EntriesElimination entry for Worksheets in 2010

Investment in Shovel22.4 Noncontrolling interest9.6Accumulated depreciation8.0Equipment40.0Accumulated depreciation8.0Depreciation expense8.0

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Pearson Education, Inc. publishing as Prentice Hall6-*2011 Worksheet EntriesWorksheet entries for 2011

Investment in Shovel16.8 Noncontrolling interests7.2Accumulated depreciation16.0Equipment40Accumulated depreciation8.0Depreciation expense8.0

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Pearson Education, Inc. publishing as Prentice Hall6-*2012 Worksheet EntriesWorksheet entries for 2012

Investment in Shovel11.2 Noncontrolling interest4.8Accumulated depreciation24.0Equipment40.0Accumulated depreciation8.0Depreciation expense8.0

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Pearson Education, Inc. publishing as Prentice Hall6-*2013 CalculationsRecognize the remaining deferred gain, sharing the impact with controlling and noncontrolling interestsUnamortized gain = 1 year at $8Pail's Income from Shovel70%(90 + 8) = $68.6Noncontrolling interest share30%(90 + 8) = $29.4Elimination entries for 2013 Worksheet

Investment in Shovel5.6 Noncontrolling interests2.4Accumulated depreciation32.0Equipment40.0Accumulated depreciation8.0Gain on sale of equipment8.0

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Pearson Education, Inc. publishing as Prentice Hall6-*Sale at Other Than Fair ValueIntercompany sales of fixed assets at prices other than fair valueDeserve scrutiny by shareholdersSales above fair value move additional cash to the sellerSales below fair value transfer valuable goods to the buyerThere is a transfer of wealth between the affiliated companies, and between the controlling and noncontrolling interests

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Pearson Education, Inc. publishing as Prentice Hall6-*Inventory Items Fixed AssetsAn intercompany sale of inventory which is acquired as a fixed assetUnrealized profit is removed from cost of sales in year of saleProfit is recognized over the fixed asset's life

Cost of salesXXX EquipmentXXXAccumulated depreciationXDepreciation expenseX

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Pearson Education, Inc. publishing as Prentice Hall6-*Copyright 2009 Pearson Education, Inc. Publishing as Prentice HallAll rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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Beams, Advanced Accounting 10e, Ch. 10Beams, Advanced Accounting 10e, Ch. 10*Pearson Education Inc., publishing as Prentice Hall**Pearson Education Inc., publishing as Prentice Hall