Student Learning Outcomes

Transcription

1 Chapter 4 Intercompany Transactions: Topic 2, Depreciable Assets; Loans and Notes Dr. Chula King Advanced Accounting The University of West Florida 1 Student Learning Outcomes Explain why transactions between members of a consolidated firm should not be reflected in the consolidated financial statements Defer intercompany sales of depreciable assets and realize the profits over the period of use and/or at the time of sale to a firm outside the consolidated group Eliminate intercompany loans and notes 2 Back to Intermediate I: Depreciable Assets Purchased a building for $100,000 cash: Cash 100,000 The building with 20 year useful life and no salvage value is depreciated by the straight line method: Depreciation expense 5,000 Accumulated depreciation 5,000 Sold the building at the beginning of year 3 for $108,000. Accumulated depreciation 10,000 Gain on sale 18,

2 The Problem Company A Company B 100,000 Cash 100, ,000 Dep n Exp 5,000 Acc. Dep n 5,000 Acc Dep n 10,000 Gain 18,000 What is the cost of the building? What is the book value of the building? What should the depreciation expense be? 5,000 What is the depreciation expense? 6,000 Building 108,000 Dep n Exp 6,000 Acc Dep n 6,000 1,000 excess x 18 years 4 The Solution Reverse everything to do with the intercompany sale, and reflect depreciation as though the intercompany sale had not occurred. Restate the depreciable asset to its original cost; Reinstate any accumulated depreciation on that asset Eliminate any gain or loss on the sale of the depreciable asset Restate the depreciation expense for current and prior years to what it would have been had the intercompany sale not occurred. Charge the seller for ALL income effects. 5 Example P Corporation owns 80% of S Company. On January 1, 20X1, P sold a building to S for $108,000. The building had a cost to P of $100,000 and accumulated depreciation of $10,000. Its remaining life was 18 years, out of an original 20 year life. S believes that the building has a remaining life of 18 years. Straight line depreciation is used by both companies. 6 2

3 The Eliminations, Year of Sale 1/1/X1 Company P (seller) Acc. Dep n 10,000 Gain 18,000 First Elimination Entry X Company S Building 108,000 Gain (P) 18,000 Whose? 7 Eliminations, Year of Sale If the building had not been sold: Company P (seller) Dep n Exp.* 5,000 Acc. Dep n 5,000 *100, = 5,000 Company S Dep n Exp* 6,000 Acc. Dep n 6,000 *108, = 6,000 1,000/year excess depreciation Second Elimination Entry Accumulated Depreciation 1,000 Depreciation Expense (P) 1,000 Whose? 8 Gain versus Excess Depreciation Sale of depreciable asset yielded a gain of $18,000 Excess Depreciation (Depreciation recorded by purchaser Depreciation by seller if not sold) is $1,000 per year for 18 years, or $18,000. Over time, the gain on sale of depreciable asset will be eliminated by the excess depreciation. The reverse would be true if the asset had been sold at a loss. 9 3

4 What about the next year? Eliminations, 12/31/X2 R/E P 18,000 Accumulated Depreciation (X1, X2) 2,000 Depreciation Expense (P) (X2) 1,000 R/E P (X1) 1, What about 20X8? Eliminations, 12/31/X8 R/E P 18,000 Accumulated Depreciation (X1 X8) 8,000 Depreciation Expense (P) (X8) 1,000 R/E P (X1 X7) 7, What if the subsidiary is the seller? Eliminations, 12/31/X8 R/E P (80% x 18,000) 14,400 R/E S (20% x 18,000) 3,600 Accumulated Depreciation (X1 X8) 8,000 Depreciation Expense (S) (X8) 1,000 R/E P (X1 X7: 80% x 7,000) 5,600 R/E S (X1 X7: 20% x 7,000) 1,

5 Intercompany Loans and Notes Assume that on October 1, 20X1, Company A borrowed $10,000 from Company B, signing a one year, 12% note. 10/1/X1 12/31/X1 Company A Cash 10,000 N/P 10,000 Int. Exp* 300 Int/Pay 300 Company B N/R 10,000 Cash 10,000 Int/Rec 300 Int. Rev. 300 *12% x 10,000 x (3/12) 13 Eliminations: The Rules The issuer of the note is charged for ALL income effects. Eliminate the note payable against the note receivable. (Also works for accounts payable and accounts receivable.) Eliminate interest payable against interest receivable. Eliminate interest revenue against interest expense. (Because the same party is charged with both the revenue and expense, the income effect is zero.) 14 Eliminations Notes Payable 10,000 Notes Receivable 10,000 Interest Payable 300 Interest Receivable 300 Interest Revenue (A) 300 Interest Expense (A)

6 Concluding Comments Intercompany sales of inventory Seller is charged with ALL income effects Eliminate intercompany sale. (Because the same party is charged with both the sale and the COGS, the income effect is zero.) Eliminate gross profit in beginning inventory. If seller is subsidiary, split retained earnings Eliminate gross profit in ending inventory, adjusted for LOCOM, if applicable 16 Concluding Comments Intercompany sale of depreciable assets Seller is charged for ALL income effects Restate the depreciable asset to its original cost; reinstate any accumulated depreciation from the seller s books; eliminate any gain or loss on the sale of the depreciable asset (R/E in years after the year of sale, split if subsidiary is the seller). Restate the depreciation expense for current and prior years to what it would have been had the intercompany sale not occurred. If the subsidiary is the seller, split retained earnings between parent and subsidiary. 17 Concluding Comments Intercompany loans and notes The issuer of the note is charged for ALL income effects. Eliminate the note payable against the note receivable. (Also works for accounts payable and accounts receivable.) Eliminate interest payable against interest receivable. Eliminate interest revenue against interest expense. (Because the same party is charged with both the revenue and expense, the income effect is zero.) 18 6

7 Work exercises 3, 4 and 7 Work problems 2, 5, 6, 11 and 13 The Next Step 19 7