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Chapter 6

Intercompany
Profit
Transactions
Plant Assets

Intercompany Profits Plant Assets:


Objectives
1. Assess the impact of intercompany profit on
transfers of plant assets in preparing
consolidations workpapers.
2. Defer unrealized profits on plant asset transfers by
either the parent or subsidiary.
3. Recognize realized, previously-deferred profits on
plant asset transfers.
4. Adjust the calculations of noncontrolling interest
share in the presence of intercompany profits on
plant asset transfers.

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Intercompany Profit Transactions Plant Assets

1: TRANSFERS OF PLANT
ASSETS

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Intercompany Fixed Asset Sales


Intercompany sales of nondepreciable fixed assets:
In year of intercompany sale
Defer any gain or loss
Restate fixed asset to cost
In years of continued ownership
Adjust investment account to defer gain or loss
(adjust noncontrolling interest too, if upstream sale)
Restate fixed asset to cost
In year of sale to outside entity
Adjust investment account (and noncontrolling
interest if upstream sale)
Recognize the previously deferred gain or loss
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Intercompany Sale of Land


Pak owns 90% of San, acquired at cost equal
to fair value. In 2011, Pak sells (downstream)
land to San and records a $10 gain. In 2015,
San sells the land to an outside entity at a $15
gain. San's separate income was $70 in 2011,
$80 per year for 2012 to 2014, and $90 in
2015.

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2011 Calculations
Defer the unrealized gain, with full effect to Pak
Pak's Income from San

90%(70) 10 = $53
Noncontrolling interest share

10%(70) = $7
Elimination entry for 2009 Worksheet
Gain on sale of land (-Ga, -SE)
Land (-A)

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10

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2012 to 2014 Calculations


Continue to defer gain, with full effect to Pak
Pak's Income from San

90%(80) = $72
Noncontrolling interest share

10%(80) = $8
Elimination entry for Worksheets in 2012 to 2014

Investment in San (+A)


Land (-A)

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10

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2015 Calculations
Recognize the previously deferred gain, with full effect
to Pak
Pak's Income from San

90%(90) + 10 = $91
Noncontrolling interest share

10%(90) = $9
Elimination entry for 2015 Worksheet
Investment in San (+A)
Gain on sale of land (Ga, +SE)

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Intercompany Profit Transactions Plant Assets

2: DEFERRING
UNREALIZED PROFITS

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Unrealized Profits on Fixed Assets


Unrealized profit or loss on nondepreciable
fixed assets
Defer in year of intercompany sale
Continue 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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6-10

Depreciable Fixed Assets


Gains and losses on intercompany sales of
depreciable fixed assets
Defer in period of intercompany sale
Recognize gain or loss over remaining life of
asset
Adjust asset and depreciation down for gains
Adjust asset and depreciation up for losses

Recognize any unamortized gain or loss upon


sale to outside entity

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Downstream Example
Per owns 80% of Sop, acquired at cost equal
to fair value. On 1/1/2011, Per sells
machinery to Sop at a $30 profit. The
machinery has a remaining life of 5 years from
1/1/2011. Sop disposes of the machinery at
book value at the end of 5 years. Sop's
income is $70 in 2011, $80 per year for 2012
to 2014, and $90 in 2015.

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2011 Calculations
Defer the unrealized gain and amortize it over 5 years
with full effect to Per
30 gain / 5 years = $6
Per's Income from Sop

80%(70) 30 + 6 = $32
Noncontrolling interest share

20%(70) = $14
Elimination entry for 2011 Worksheet
Gain on sale of machinery (-Ga, -SE)

30

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)
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Intercompany Profit Transactions Plant Assets

3: RECOGNIZING
REALIZED, PREVIOUSLY
DEFERRED PROFITS

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Previously Deferred Gains/Losses


Recognize over the life of the depreciable
asset
Downstream sales
Adjust investment in subsidiary account

Upstream sales
Adjust investment in subsidiary account and
noncontrolling interest, proportionately

Intercompany sales at a gain


Adjust asset and depreciation down

Intercompany sales at a loss


Adjust asset and depreciation up

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2012 to 2014 Calculations


Continue to recognize part of the gain, with full effect
to Per
Per's Income from Sop

80%(80) + 6 = $70
Noncontrolling interest share

20%(80) = $16
Elimination entry for Worksheets in 2012
Investment in Sop (+A)
Accumulated depreciation (+A)

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6

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)
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6
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Entries (cont.)
Worksheet entries for 2013
Investment in Sop (+A)

18

Accumulated depreciation (+A)

12

Machinery (-A)
Accumulated depreciation (+A)

30
6

Depreciation expense (-E, +SE)

Worksheet entries for 2014


Investment in Sop (+A)

12

Accumulated depreciation (+A)

18

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)
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6
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2015 Calculations
Recognize the remaining deferred gain, with full
effect to Per
Per's Income from Sop

80%(90) + 6 = $78
Noncontrolling interest share

20%(90) = $18
Elimination entries for 2015 Worksheet
Investment in Sop (+A)
Accumulated depreciation (+A)

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24

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)
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Intercompany Profit Transactions Plant Assets

4: IMPACT ON
NONCONTROLLING
INTEREST

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Sharing Unrealized Gain or Loss


Upstream sales of fixed assets require:
Deferring the gain or loss on the sale
Recognizing a portion of the gain or loss as the
asset depreciates
Writing off any unrecognized gain or loss upon
the sale of the asset
Sharing the gains and losses between the
controlling and noncontrolling interests

Upstream sales impact noncontrolling


interests!

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Upstream Example
Pail owns 70% of Shovel, acquired at cost
equal to fair value. On 1/1/2011, Shovel sells
machinery to Pail at a $40 profit. The
machinery has a remaining life of 5 years from
1/1/2011. Pail uses the machinery for four
years, then sells it at a profit at the start of
2015. Shovel's income is $70 in 2011, $80 per
year for 2012 to 2014, and $90 in 2015.

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2011 Calculations
Defer the unrealized gain and amortize it over 5 years
sharing the gain
40 gain / 5 years = $8
Pail's Income from Shovel

70%(70 40 + 8) = $26.6
Noncontrolling interest share

30%(70 40 + 8) = $11.4
Elimination entry for 2011 Worksheet
Gain on sale of machinery (-Ga, -SE)

40

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)
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40
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8
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2012 to 2014 Calculations


Continue to recognize part of the gain, sharing
its effect between the controlling and
noncontrolling interests
Pail's Income from Shovel

70%(80 + 8) = $61.6
Noncontrolling interest share

30%(80 + 8) = $26.4

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2012 Worksheet Entries


Elimination entry for Worksheets in 2012
Investment in Shovel (+A)

22.4

Noncontrolling interest (-SE)

9.6

Accumulated depreciation (+A)

8.0

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)

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40.0
8.0
8.0

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2013 Worksheet Entries


Worksheet entries for 2013
Investment in Shovel (+A)
Noncontrolling interests (-SE)
Accumulated depreciation (+A)

16.8
7.2
16.0

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)

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40
8.0
8.0

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2014 Worksheet Entries


Worksheet entries for 2014
Investment in Shovel (+A)
Noncontrolling interest (-SE)
Accumulated depreciation (+A)

11.2
4.8
24.0

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)

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40.0
8.0
8.0

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2015 Calculations
Recognize the remaining deferred gain, sharing the impact with
controlling and noncontrolling interests
Unamortized gain = 1 year at $8
Pail's Income from Shovel
70%(90 + 8) = $68.6
Noncontrolling interest share
30%(90 + 8) = $29.4
Elimination entries for 2015 Worksheet
Investment in Shovel (+A)

5.6

Noncontrolling interests (-SE)

2.4

Accumulated depreciation (+A)

32.0

Machinery (-A)
Accumulated depreciation (+A)
Gain on sale of machinery (Ga, +SE)

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40.0
8.0
8.0

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Sale at Other Than Fair Value


Intercompany sales of fixed assets at prices
other than fair value
Deserve scrutiny by shareholders
Sales above fair value move additional cash to
the seller
Sales below fair value transfer valuable goods to
the buyer
There is a transfer of wealth between the
affiliated companies, and between the controlling
and noncontrolling interests

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Inventory Items Fixed Assets


An intercompany sale of inventory which is
acquired as a fixed asset
Unrealized profit is removed from cost of sales in
year of sale
Profit is recognized over the fixed asset's life
Cost of sales (E, -SE)

XXX

Machinery (-A)
Accumulated depreciation (+A)
Depreciation expense (-E, +SE)

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XXX
X
X

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