NAMA : DEDI MIZWAR

NPM : 0117104027
KELAS : REGULER B2B

PERTEMUAN 9
Transfers of Plant Assets
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
Example
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. What you
have to do?
Answer:
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) 10

 Land (-A) 10

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) 10

Land (-A) 10

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) 10

Gain on sale of land (Ga, +SE) 10

Deferring Unrealized Profits

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
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

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. What you have to do?
Answer:
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) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6

Recognizing Realized, Previously Deferred Profits

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

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) 24

Accumulated depreciation (+A) 6
Machinery (-A) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6

Worksheet entries for 2013

Investment in Sop (+A) 18

Accumulated depreciation (+A) 12

 Machinery (-A) 30

Accumulated depreciation (+A) 6

Depreciation expense (-E, +SE) 6

Worksheet entries for 2014

Investment in Sop (+A) 12

Accumulated depreciation (+A) 18

Machinery (-A) 30

Accumulated depreciation (+A) 6

Depreciation expense (-E, +SE) 6

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) 6

Accumulated depreciation (+A) 24

Machinery (-A) 30

Accumulated depreciation (+A) 6

 Depreciation expense (-E, +SE) 6

PERTEMUAN 10
Intercompany Profit Transactions – Plant Assets

1: TRANSFERS OF PLANT ASSETS

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

4: IMPACT ON NONCONTROLLING INTEREST

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 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.

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, 40

-SE)
Machinery (-A) 40

Accumulated depreciation (+A) 8

Depreciation expense (-E, +SE) 8

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

Elimination entry for Worksheets in 2012

Investment in Shovel (+A) 22.4
Noncontrolling interest (-SE) 9.6

Accumulated depreciation (+A) 8.0

Machinery (-A) 40.0

Accumulated depreciation (+A) 8.0

Depreciation expense (-E, +SE) 8.0

Worksheet entries for 2013

Investment in Shovel (+A) 16.8
Noncontrolling interests (-SE) 7.2
Accumulated depreciation (+A) 16.0
Machinery (-A) 40
Accumulated depreciation (+A) 8.0
Depreciation expense (-E, +SE) 8.0

Worksheet entries for 2014

Investment in Shovel (+A) 11.2
Noncontrolling interests (-SE) 4.8
Accumulated depreciation (+A) 24.0
Machinery (-A) 40
Accumulated depreciation (+A) 8.0
Depreciation expense (-E, +SE) 8.0
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) 40
Accumulated depreciation (+A) 8.0
Depreciation expense (-E, +SE) 8.0

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

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) XXX
Accumulated depreciation (+A) X

Depreciation expense (-E, +SE) X

PERTEMUAN 11
Intercompany Profit Transactions – Bonds
Remove intercompany:
- Payables and interest expense
- Receivables and interest income
Loans directly between affiliates generally pose no special problems.

Retirement of Debt
- Issuing firm uses own resources to retire its own bonds – no intercompany (IC) issues

- Issuing firm borrows from unaffiliated entity and uses funds to retire its own debt – no IC

- Issuing firm borrows from affiliate and uses funds to retire its own debt – simple IC loan

- Non-issuing firm purchases debt securities of an affiliate resulting in constructive retirement –

IC constructive retirement

Constructive Retirement
One company purchases debt instruments of an affiliate from outside entities
Constructive gains and losses on bonds
1.Realized gains and losses from the consolidated viewpoint
2.That arise when a company purchases the bonds of an affiliate
3.From other entities
4.At a price other than the book value of the bonds.

Parent is Issuer
At constructive retirement
- Remove Investment in Bonds
- Remove proportionate share of Bonds payable and unamortized premium or discount
- Realize a gain or loss
The gain or loss at constructive retirement is recognized over the life of the bonds Gain or loss is
attributed solely to the parent

Example :
Pam owns 70% of Sue, acquired at book value. Sue's net income for 2012 is $220.
On 1/1/12, Pam has $10,000 bonds outstanding with unamortized premium of $100. Bonds
mature in 5 years. Straight line amortization. Interest is 10%, payable semi-annually.
On 1/1/12, Sue acquires $1,000 of Pam's bonds on the open market at $950. Straight line.
- Portion of bonds retired: 1,000/10,000 = 10%
- Gain on retirement: 10%(10,100) – 950 = $60
- Pam's Investment in Sue: 70%(220) + 60 – 12 = $202
- Noncontrolling interest share: 30%(220) = $66

Amortizations and Interest

 PAM’S  Book value  Fiscal Year  Book value  Fiscal Year  Book value
BOOKS: 1/1/2012 2012 12/31/ 2012 2013 12/31/ 2013
 Bonds  $10,100  -$20  $10,080  -$20  $10,060
payable

 Retired  $1,010    $1,008    $1,006

10%
 Interest    600+600-     600+600-20  
expense 20 = $ 1180 = $ 1180
 Retired    $ 118   $ 118  
10%
           
 SUE'S          
BOOKS:
 Investment  $ 950  +$10  $960  +$10  $970
in bonds
 Interest    60 + 60    60+60+10=  
income +10= $ 130 $130

Entries for 2012 worksheet.

1. (Dr) Bonds payable (-L)    1,008
   (Cr) Investment in bonds (-A) 960
  (Cr) Gain on retirement of bonds (Ga, +SE) 48

2. (Dr) Interest income (-R, -SE) 110

   (Cr) Interest expense (-E, +SE) 98
   (Cr)  Gain on retirement of bonds (Ga, +SE) 12

3. (Dr) Interest payable (-L) 50

    (Cr) Interest receivable (-A) 50