Chapter 6: Intercompany Profit

Transactions Plant Assets

by Jeanne M. David, Ph.D., Univ. of Detroit Mercy
to accompany

Advanced Accounting, 10th edition

by Floyd A. Beams, Robin P. Clement,
Joseph H. Anthony, and Suzanne Lowensohn

Pearson Education, Inc. publishing as Prentice Hall

6-1

Intercompany Profits Plant

Assets: Objectives
1. Assess the impact of intercompany profit on
transfers of plant assets in preparing
consolidations working papers.
2. Defer unrealized profits on asset transfers by
either the parent or subsidiary.
3. Recognize realized, previously deferred profits
on asset transfers by the parent or subsidiary.
4. Adjust the calculation of noncontrolling interest
amounts in the presence of intercompany profits
on 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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6-4

Intercompany Sale of Land

Park 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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2009 Calculations
Defer the unrealized gain, with full effect to Park
Park's Income from Stan
90%(70) 10 = $53
Noncontrolling interest share
10%(70) = $7
Elimination entry for 2009 Worksheet
Gain on sale of land
Land
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10
10
6-6

2010 to 2012 Calculations

Continue to defer gain, with full effect to Park
Park's Income from Stan
90%(80) = $72
Noncontrolling interest share
10%(80) = $8
Elimination entry for Worksheets in 2010 to 2012
Investment in Stan
Land
Pearson Education, Inc. publishing as Prentice Hall

10
10
6-7

2013 Calculations
Recognize the previously deferred gain, with full
effect to Park
Park's Income from Stan
90%(90) + 10 = $91
Noncontrolling interest share
10%(90) = $9
Elimination entry for 2013 Worksheet
Investment in Stan
10
Gain on sale of land
10
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6-8

Intercompany Profit Transactions Plant Assets

2: Deferring Unrealized Profits

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6-9

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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6-11

Downstream Example
Perry 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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6-12

2009 Calculations
Defer the unrealized gain and amortize it over 5
years with full effect to Perry
30 gain / 5 years = $6
Perry's Income from Soper
80%(70) 30 + 6 = $32
Noncontrolling interest share
20%(70) = $14
Elimination entry for 2009 Worksheet
Gain on sale of equipment
Equipment
Accumulated depreciation
Depreciation expense
Pearson Education, Inc. publishing as Prentice Hall

30
30
6
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Intercompany Profit Transactions Plant Assets

3: Recognizing Realized, Previously

Deferred Profits
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6-14

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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6-15

2010 to 2012 Calculations

Continue to recognize part of the gain, with full
effect to Perry
Perry's Income from Soper
80%(80) + 6 = $70
Noncontrolling interest share
20%(80) = $16
Elimination entry for Worksheets in 2010
Investment in Soper
24
Accumulated depreciation
6
Equipment
30
Accumulated depreciation
6
Depreciation expense
6
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6-16

Entries (cont.)
Worksheet entries for 2011
Investment in Soper
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

18
12

Investment in Soper
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

12
18

Worksheet entries for 2012

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30
6
6

30
6
6
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2013 Calculations
Recognize the remaining deferred gain, with full
effect to Perry
Perry's Income from Soper
80%(90) + 6 = $78
Noncontrolling interest share
20%(90) = $18
Elimination entries for 2013 Worksheet
Investment in Soper
6
Accumulated depreciation
24
Equipment
30
Accumulated depreciation
6
expense
6
Pearson Depreciation
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Hall
6-18

Intercompany Profit Transactions Plant Assets

4: Impact on Noncontrolling Interest

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6-19

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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6-20

Upstream Example
Pail 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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6-21

2009 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 2009 Worksheet
Gain on sale of equipment
40
Equipment
40
Accumulated depreciation
8
Depreciation expense
8

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6-22

2010 to 2012 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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6-23

2010 Worksheet Entries

Elimination entry for Worksheets in 2010
Investment in Shovel
Noncontrolling interest
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

Pearson Education, Inc. publishing as Prentice Hall

22.4
9.6
8.0
40.0
8.0
8.0

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2011 Worksheet Entries

Worksheet entries for 2011
Investment in Shovel
Noncontrolling interests
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

Pearson Education, Inc. publishing as Prentice Hall

16.8
7.2
16.0
40
8.0
8.0

6-25

2012 Worksheet Entries

Worksheet entries for 2012
Investment in Shovel
Noncontrolling interest
Accumulated depreciation
Equipment
Accumulated depreciation
Depreciation expense

Pearson Education, Inc. publishing as Prentice Hall

11.2
4.8
24.0
40.0
8.0
8.0

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2013 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 2013 Worksheet
Investment in Shovel
5.6
Noncontrolling interests
2.4
Accumulated depreciation
32.0
Equipment
40.0
Accumulated depreciation
8.0
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6-27
Gain on sale of equipment
8.0

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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6-28

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
Equipment
Accumulated depreciation
Depreciation expense
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Copyright 2009 Pearson Education, Inc.

Publishing as Prentice Hall
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6-30