Despite the internal information benefits of accounting for the transaction between a business combination where the two separate companies retain their legal identities as separate operating centers, when inventory sales occur between the two entities...
neither a sale nor a purchase has occurred
an intra-entity transfer is merely the internal movement of ______, an event that creates no ____
an intra-entity transfer is merely the internal movement of inventory, an event that creates no net change in the financial position of the business combination taken as a whole
As a result of no net change in the financial position of the business combination taken as a whole, the recorded effects of inventory transfers are
eliminated so that consolidated statements reflect only transactions with outside parties
To account for related companies as a single economic entity requires eliminating all
intra-entity sales/purchases balances
BEFORE the following consolidation worksheet entry is then necessary to remove the resulting balances from the externally reported figures (assume Arlington Company makes an $80K inventory sale to Zirkin Company, an affiliated party with a business combin
both companies record the transfer in their internal records as a normal sale/purchase
the following consolidation worksheet entry is then necessary to remove the resulting balances from the externally reported figures (assume Arlington Company makes an $80K inventory sale to Zirkin Company, an affiliated party with a business combination)
(debit) Sales ... $80K
(credit) COGS (purchases component) ... $80K
(To eliminate effects of intra-entity transfer of inventory; labeled TI in reference to the transferred inventory)
In the preparation of consolidated financial statements, this elimination must be made for all intra-entity inventory transfers
(debit) Sales ...
(credit) COGS (purchases component)
for the value of the transfer
The total recorded (intra-entity) sales
figure is deleted regardless of whether the transaction was _________ or ___________
downstream (from parent to subsidiary)
upstream (from subsidiary to parent)
Any gross profit included in the transfer price _____________ this sales/purchases elimination. Why?
does not affect; Because the entire amount of the transfer occurred b/t related parties, the total effect must be removed in preparing consolidated statements
Despite the elimination of sales and COGS _____________________ can still exist in the account records at year-end
unrealized gross profits created by such sales can still exist in the accounting records at year-end.
When do unrealized gross
profits created by such sales can still exist in the accounting records at year-end occur as a result of the merchandise being priced above
historical cost
Regardless of the method used for this pricing decision, intra-entity profits that remain unrealized at year-end must be
removed in arriving at consolidated figures
TI stands for
transferred Inventory
If Company A company acquired inventory at a cost of $50K, then sold it to Company Z for $80K, Company A, the $30K inflation created by the transfer price exists in two areas of the individual statements:
(1) ending inventory remains overstated by $30k
(2) GP is artificially overstated by the same amount
Correcting the ending $30K overstatement in Ending Inventory only requires __________; however before decreasing gross profit, the accounts affected by the incomplete earnings should be ______
reducing the asset; identified
The ending inventory total serves as a ____________ within the COGS computation; it represents the portion of acquired inventory that was _____ -- therefore, the $30K overstatement of the inventory that is still held incorrectly _____ the inventory that w
The ending inventory total serves as a NEGATIVE COMPONENT within the COGS computation; it represents the portion of acquired inventory that was NOT SOLD -- therefore, the $30K overstatement of the inventory that is still held incorrectly DECREASES the inv
Despite the Entry TI (transferred inventory), the inflated ending inventory figure causes COGS to be too ____, and thus profits _____ by $30K
the inflated ending inventory figure causes COGS to be too low, and thus profits to be too high by $30K
Entry to remove unrealized gross profit created by intra-entity sale
(debit) COGS (ending inventory component) ... $30K
(credit) Inventory (balance sheet account) ... $30K
What does the entry to remove unrealized gross profit created by intra-entity sale do?
It reduces the consolidated Inventory account to its original $50K historical cost; furthermore, increasing COGS by $30K effectively removes the unrealized amount from recognized GP
The entry to remove unrealized gross profit created by intra-entity sale removes the unrealized amount from
recognized gross profit
How are intra-entity profits ultimately realized?
by subsequently consuming or reselling purchased goods
Only the transferred inventory still held at year-end
continues to be recorded in the separate statements at this value:
a value more than the historical cost
the elimination of unrealized gross profit (Entry G ) is based not on _____, but only on the amount of
the elimination of unrealized gross profit (Entry G ) is based not on total intra-entity sales but only on the amount of transferred merchandise retained within the business at the end of the year.
assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties but retains the
earned the profit on the $60,000 portion of the intra-entity sale and need not make an adjustment for consolidation purposes.
Conversely, any gross profit recorded in connection with the $20,000 in merchandise that remains is still a component within Zirkin's (the company that was originally transferred the $80k in inventory ($30K GP for Arlington))
INVENTORY ACCOUNT
What is the GP rate for $30K gross profit on $80K transfer price?
37.5% ($30K GP / $80K Transfer Price)
Because the GP rate was 37.5%, the retained inventory is stated at a value ______ more than its original cost (remember that $20,000 of inventory was still retained)
the inventory is now stated $7,500 higher than its original cost ($20K remaining inventory x 37.5% = $7,500 in unrealized GP that remains in inventory)
How would you record this $7,500 in unrealized GP that remains in inventory?
CONSOLIDATION ENTRY G - YEAR OF TRANSFER (YEAR 1) 25% OF INVENTORY REMAINS (REPLACES PREVIOUS ENTRY)
(debit) COGS (ending inventory component) ...7,500
(credit) Inventory ....7,500
(To remove unrealized portion of intra-entity GP in year of transfer)
Whenever unrealized intra-entity profit is present in ending inventory, one further consolidation entry is eventually required. Although Entry G __________________ in the year of transfer, the $7,500 overstatement remains within the separate financial rec
Although Entry G (previous flashcard) removes the gross profit from the CONSOLIDATED inventory balances
To remove unrealized gross profit from beginning figures so that it is recognized currently in the period in which the earning process is completed
(debit) Retained Earnings (beginning balance of seller) ......7,500
(credit) COGS (beginning inventory component) ...7,500
For consolidation purposes, the unrealized portion of the intra-entity gross profit must be adjusted in two successive years in what way?
(from ending inventory in the year of transfer and from beginning inventory of the next period).
Even after removing the unrealized portion of intra-entity gross profit in the year of transfer.... when referring again to Arlington's sale of inventory to Zirkin, the $7,500 unrealized gross profit is still in Zirkin's Inventory account at which point i
at the start of the subsequent year; Once again, the overstatement is removed within the consolidated process, but this time from beginning inventory balance
at the start of the subsequent year; Once again, the overstatement is removed within the consolidated process, but this time from ______
beginning inventory balance
The elimination entray "*G" means
the *G indicates that a previous year transfer created the intra-entity profits
The Consolidation Entry *G - Year Following Transfer (Year 2) to remove the unrealized GP from beginning figures so that it is recognized currently in the period in which the earnings process is completed
(debit) Retained Earnings (beg. balance of seller) ...7,500
(credit) COGS (beg inventory component) ..7,500
This entry does what for gross profit in the second year?:
(debit) Retained Earnings (beg. balance of seller) ...7,500
(credit) COGS (beg inventory component) ..7,500
Reducing Cost of Goods Sold (beginning inventory) through this worksheet entry increases the gross profit reported for this second year.
For consolidation purposes, the
gross profit on the transfer is recognized in the period in which the items are
actually sold to outside parties
In producing consolidated financial statements, what is the recorded effect of intra-entity inventory transactions?
The recorded effects of transfers are eliminated so that consolidated statements reflect only transactions with outside parties
1) journal entry to remove the effects of the actual intra-entity transfer for a sale valued at $80,000
2) Does this entry have to be made for all intra-entity transfers??
3) How about if the transfer is upstream or downstream? Does this journal entry sti
1) (debit) SALES .... 80,000
(credit) COGS .... 80,000
2) YES
3) YES
4) No, it does not.
Unrealized Gross Profit - Year of Transfer (Year 1)
1) Despite the sales/purchases journal entry elimination (debit sales, credit COGS), what can still exist in the accounting records at year-end?
2) When do these profits occur?
3) Actual transfer prices
1) Unrealized gross profits created by such sales can still exist in the accounting records at year-end.
2) When merchandise is priced higher than HISTORICAL cost
3) including the normal sales price of the inventory, sales price less a specified discount,
Unrealized Gross Profit - Year of Transfer (Year 1)
Assume Arlington acquired or produced inventory at a cost of $50,000 and then sold it to Zirkin, an affiliated party, at the indicated $80,000 price. From a consolidated perspective, the inventory still
1) Because the transaction did not occur with an outside party, recognition of this profit is not appropriate for the combination as a whole.
2) Ending inventory remains overstated by $30K and GP is artificially overstated by this same amount
3) it would
Despite the TI entry (debit sales, credit COGS), the inflated ending inventory figure causes COGS to be too ____, and thus profits to be _____
COGS to be too LOW; Profits to be too HIGH
Unrealized Gross Profit - Year of Transfer (Year 1)
Assume Arlington acquired or produced inventory at a cost of $50,000 and then sold it to Zirkin, an affiliated party, at the indicated $80,000 price. From a consolidated perspective, the inventory still
CONSOLIDATION ENTRY G
(debit) COGS (ending inventory component) ...$30K
(credit) Inventory (balance sheet account) $30K
What does this entry do?
CONSOLIDATION ENTRY G
(debit) COGS (ending inventory component) ...$30K
(credit) Inventory (balance sheet account) $30K
Reduces the CI (Consolidated Inventory) account to its originaly $50,000 historical cost.. Furthermore, increasing COGS by $30K effectively removes the unrealized amount from recognized gross profit. IT REMOVES GP FROM THE CONSOLIDATED INVENTORY BALANCE I
______________________ continues to be recorded in the separate statements at a value more than the historical cost
ONLY the transferred inventory still held at year end
Intra-entity profits ultimately are realized by subsequently consuming
or reselling these goods. Therefore, only the transferred inventory still held at year-end continues to be recorded in the separate statements at a value more than the historical cost.
the amount of transferred merchandise retained within
the business at the end of the year.
Entry G does what?
Removes the gross profit from the intra-entity transaction for the "seller
To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties b
need not make an adjustment for consolidation purposes
To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties b
37.5% ($30,000 GP / $80,000 Transfer Price)
To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties b
$7,500 ($20,000 inventory retained x 37.5% GPR)
To illustrate, assume that Arlington transferred inventory costing $50,000 to Zirkin, a related company, for $80,000, thus recording a gross profit of $30,000. Assume further that by year-end Zirkin has resold $60,000 of these goods to unrelated parties b
JOURNAL ENTRY G (REMOVE GP
(debit) COGS (ending inventory component) ...$7,500
(credit) Inventory (balance sheet account) $7,500
By doing the required reduction (Entry G), you are not recording ________ but only the ______
you are not recording the entire $30K shown previously but only the $7.5K unrealized GP that remains in inventory
Unrealized Gross Profit�Year Following Transfer (Year 2)
After Entry G, which removes the gross profit from the consolidated inventory balances in the year of transfer, you have to remove the $7,500 overstatement, which remains within the separate financi
beginning inventory balance
Unrealized Gross Profit�Year Following Transfer (Year 2)
After Entry G, which removes the gross profit from the consolidated inventory balances in the year of transfer, you have to remove the $7,500 overstatement, which remains within the separate financi
which appears in the financial statements only as a positive component of COGS
What does elimination entry *G mean?
The asterisk indicates that a previous year transfer created the intra-entity gross profits
Consolidation Entry *G - Year Following Transfer (Year 2) Journal Entry for the same situation above
(debit) Retained Earnings (beginning balance of seller) ....$7,500
(credit) COGS (beginning inventory component
What does the below entry do with respect to gross profit in the 2nd year?
Consolidation Entry *G - Year Following Transfer (Year 2) Journal Entry for the same situation above
(debit) Retained Earnings (beginning balance of seller) ....$7,500
(credit) COG
it increases gross profit in the second year
Entry G _____ gross profit
defers
Entry *G ____ gross profit
recognizes
Why does the G* begin by decreasing the seller's beginning Retained Earnings account? Despite the consolidation entries in Year 1, the $7,500 gross profit........
remained on the company's separate books and was closed to Retained Earnings at the end of the period
Recall that consolidation entries are never posted to the
individual affiliate's books
Recall that consolidation entries are never posted to the individual affiliate's books. Therefore, from a consolidated view, the buyer's COGS (through the beginning inventory component) and the seller's Retained Earnings accounts as of the beginning of Ye
unrealized profit; both must be reduced via entry *G
Intra-Entity Beginning Inventory Profit Adjustment�Downstream Sales When
Parent Uses Equity Method
The worksheet elimination for intra-eneity sales/purchases (Hint: Entry _____)
Entry TI
What is the one specific situation that the consolidation entry to recognize intra-entity beginning inventory gross profit differs from entry *G?
If (1) original transfer is downstream (intra-entity sales made by the parent)
and (2) the parent applies the equity method for internal accounting purposes
Regarding the solo situation for the different *G journal entry, what is that journal entry?
Consolidation Entry
G�Year Following Transfer (Year 2 (replaces previous Entry
*G for downstream transfers when the equity method is used)
(debit) Investment in Subsidiary ...7,500
(credit) COGS ...7,500
Why debit the Investment in Subsidiary (and not the parent's beginning Retained
Earnings) account in this situation? When the parent uses the equity method in its internal
records, it recognizes _____
beginning inventory gross profits on its books (and defers
intra-entity ending inventory gross profits) as part of its equity income accruals. Therefore,
both the parent's net income and retained earnings appropriately reflect consolidated
balances.
GPR Formula =
Gross Profit / Sales
Markup on cost (MC) =
Gross Profit / COGS
also = GPR / (1 - GPR)
Intra-entity profit =
Transfer Price x GPR
To summarize, for intra-entity beginning inventory profits resulting from downstream
transfers when the parent applies the equity method:
1) The parent's beginning retained earnings reflect the consolidated balance from application
of the equity method an
1) adjustment
2) Year 1 intra-entity downstream profits.
3)the profit in the year of sale to outsiders.
Unrealized Gross Profit�Effect on Noncontrolling Interest
1) What is the consolidated net income prior to the reduction?
To illustrate, assume that Large Company owns 70 percent of the voting stock of Small Company. To avoid extraneous complications, assu
$560,000 (The two income balances less the unrealized gross profit; $500,000 + $100,000 - $40,000)
How could you report the noncontrolling interest's share of Small's income? (hint: 2 ways)
To illustrate, assume that Large Company owns 70 percent of the voting stock of Small Company. To avoid extraneous complications, assume that no amortization expens
Either as $30K (30% of the $100k earnings of the subsidiary)
or $18,000 (30% of reported income after that figure is reduced by the $40,000 unrealized gross profit)
To summarize, for intra-entity beginning inventory profits resulting from downstream
transfers when the parent applies the equity method:
1) The parent's beginning retained earnings reflect the ______ from application
of the equity method and need no adju
1) consolidated balance
2) Year 1 intra-entity downstream profits.
3)
If a transfer
is downstream (the parent sells inventory to the subsidiary), a logical view would seem
to be that the unrealized gross profit is that of ________. Why?
the parent company; Because the parent made the original sale; therefore, the GP is included in its financial records
1) If a transfer is downstream, how does this affect the subsidiary's income?
2) If a transfer is downstream, what justification exists for adjusting the non-controlling interest to reflect the deferral of unrealized gross profit?
1) it doesn't.
2) There is no justification because the subsidiary's income is unaffected
If a subsidiary sells inventory to the parent (an upstream transfer), the subsidiary's income remains unrealized from what perspective?
a consolidation perspective
**How is the non-controlling interest's share of consolidated net income computed?
It's based on the reported income of the subsidiary after adjustment for any unrealized upstream gross profits
Regarding the example below, if the $40,000 unrealized gross profit results from an upstream sale from subsidiary to parent, only ______ of Small's $100,000 reported income actually has been earned by the end of the year.
To illustrate, assume that Large
$60,000 ($100K of Small's income - $40K of the unrealized GP from the upstream intra-entity transfer)
Although the noncontrolling interest figure is based here on the subsidiary's reported
income adjusted for the effects of upstream intra-entity transfers, does GAAP require this treatment?
No
The Development of Consolidated Totals
The following summarizes the effects of intra-entity inventory transfers on consolidated totals.
1) Revenues
2) COGS
3) Net Income Attributable to the Noncontrolling Interest
4) Retained Earnings at the Beginning of
1) Revenues - Parent and subsidiary balances are combined, but all intra-entity transfers are them removed
2) COGS - Parent and subsidiary balances are combined, but all intra-entity transfers are removed. The resulting total is decreased by any beginning
When does the distinction between upstream and downstream transfer become significant?
When the parents uses the equity method and in the presence of a noncontrolling interest
Under the equity method, the parent's investment-related accounts are subjected to
1)
2)
3)
4)
(1) income
accrual,
(2) excess fair over book value amortization,
(3) adjustments required by unrealized intra-entity gross profits, and
(4) dividends.
Intra-Entity Transfers 2014 and 2015 sheet (order)
Transfer
Prices.....$80K (2014)....$100k (2015)
Historical
Cost.... $60K (2014) ...........$70K (2015)
GP......= $20k ................. $30k
Inventory Remaining
at year-end
(at transfer price)...
$16k (2014) ...........$20k (2015)
Gross Profit %-age 25%..
How would you remove $4,000 of intra-entity gross profit carried over in beginning inventory from a 2014 intra-entity downstream transfer if the parent utilized the equity method?
Assume:
Transfer Price: $80,000
Historical Cost: $60,000
Inventory Remainin
(debit) Investment in Bottom ........4,000
(credit) COGS ...4,000
=(80,000-60,000)
Regarding the Top Company and Bottom Company, what would Bottom Co. reported income for 2014 LESS database amortization be?
Bottom Co's adjusted net income
What is bottom co's adjusted 2014 net income x Top's ownership percentage equal to?
Top's share of Bottom Income
After you arrive at Top's share of bottom income, what do you do?
You remove the deferred profit from Top Company's 2014 downstream sales
After you remove Top Company's 2014 downstream sales, what does that equal?
Equity earnings in Bottom Company, 2014
INVESTMENT BALANCES-EQUITY METHOD - DOWNSTREAM SALES
How do you get to Equity Earnings of Bottom Company in the first year (2014)
1)
2)
3) =
4) x __%
5) =
6) -
7)
8) -
9)
1) Bottom Co. reported income for 2014
2) Less "database" amortization
3) = Bottom Co adjusted 2014 net income
4) x Top's ownership pecentage
5) = Top's share of Bottom income
6) - Deferred profit from Top's 2014 downstream sales
7) = Equity earnings of b
What is different about the 2nd year? What is added in?
After Step 5, you recognize the deferred gross profit from the first year before deferring the profit from Top's 2015 downstream sales
consolidated sales (downstream)
sales of parent
+ sales of subsidiary
-intra entity transfer sales
consolidated operating expenses (downstream)
add parent and subsidiary balances
- recognition of amortization expense for current year on excess fair value allocated to "database
consolidated equity earnings of bottom (downstream)
None. It's eliminated via *G entry
retained earnings (downstream)
Just Parent's retained earnings
You eliminate the subsidiary's stockholders' equity accounts along with recognition of the noncontrolling interest as of January 1.
consolidated dividends declared (downstream)
parent's dividends
+ subsidiary's dividends
- elimination of intra-entity dividend
- non-controlling interest share of dividend
consolidated cash and receivables (downstream)
parent's balance
+ subsidiary's balance
- elimination of intra-entity receivable/payable balances
consolidated inventory (downstream)
parent balance
+ subsidiary balance
- removal of gross profit from beginning figures so it can be recognized in current period. downstream sales attributed to parent
consolidated investment in bottom (downstream)
parent balance
- elimination of intra-entity dividend
- elimination of intra-entity income after *G elimination
consolidated land (downstream)
parent balance
+ subsidiary balance
consolidated plant assets (net)
parent balance
+ subsidiary balance
consolidated "database
allocation of excess fair value over subsidiary's book value, unamortized balance on January 1
- recognition of amortization expense for current year on excess fair value allocated to "database
consolidated total assets (downstream)
parent balance
+ subsidiary balance
consolidated liabilities (downstream)
parent balance
+ subsidiary balance
- elimination of intra-entity receivable/purchase balances
consolidated common stock (downstream)
parent balance
+ subsidiary balance
- elimination of subsidiary's stockholder's equity accounts along with recognition of the noncontrolling interest as January 1
consolidated common stock (downstream)
parent balance
+ subsidiary balance
- elimination of subsidiary's stockholder's equity accounts along with recognition of the noncontrolling interest as of January 1
Because intra-entity transfers are downstream, realized gross profits are considered to relate soley to ____ ; what effect does this have on the subsidiary or the outside ownership? How is the noncontrolling interest's share of consolidated income affecte
the parent company; it has no effect on either. The noncontrolling interest's share of consolidated income is UNAFFECTED by the downstream entity profit deferral and subsequent recognition
If Parent Has $70,000 in income and $2,500 in amortization of current year database excess fair-value amortization, what would the allocated income to Subsidiary, if the parent owns 80%?
0
A $4,000 gross profit is removed on the worksheet from 2014 figures and subsequently recognized in 2015 describes what journal entry? Does this affect the noncontrolling interest? Why?
Entry *G; does not affect noncontrolling interest b/c it's downstream
A $6,000 gross profit is deferred in a similar fashion from 2015 and subsequently recognized in 2016 describes what journal entry? Does this affect the noncontrolling interest? Why?
Entry G; does not affect noncontrolling interest b/c it's downstream
Special Equity Method Procedures for Unrealized Intra-Entity Profits from Downstream Transfers
For significant
influence investments, an investor company defers unrealized intra-entity gross
profits only to the extent of its percentage ownership, regardle
whether the profits resulted from upstream or downstream transfers
why the distinction? When control (rather than just significant influence) exists,
100 percent of all intra-entity gross profits are
removed from consolidated net income
regardless of the direction of the underlying sale.
Upstream Inventory Transfers: Parent Uses the Equity Method
As previously discussed, upstream gross profits are attributed to the
subsidiary rather than to the parent company
If the $4,000 BEGINNING INVENTORY gross profit recognition (Entry *G) and the $6,000 unrealized gross profit DEFERRAL (Entry G) were UPSTREAM transfers, how would they be recorded?
As adjustments to the subisiary's reported totals.
Entry to eliminate current year intra-entity sales/purchases (downstream)
(debit) Sales ........100,000
(credit) COGS ........ 100,00
Assume 2015 (2nd year) transfer of $100K, historical cost of $70k, inventory remaining at year end of $20,000.
1) Entry to remove current year intra-entity sales/purchases (downstream; Consol. Entry TI; parent uses equity method)
2) Entry to defer intra-e
1) (debit) Sales ....$100,000
(credit) COGS ..... $100,000
2)
(debit) COGS ..... 6,000
(credit) Inventory ....6,000
Calculated as:
Transfer Price: $100,000
Historical Cost: $70,000 (GP = 30%)
Ending Inventory: $20,000
Gross Profit: 30%
= 20,000 * 30% = $6
INVESTMENT BALANCES - EQUITY METHOD - UPSTREAM SALES - PARENT USES EQUITY METHOD - STEP-BY-STEP
FIRST YEAR!
1) You start with
2abc) Then you compute the following subtotal:
3) This subtotal equals
4) Multiply this by ____
5) To arrive at ___
6) Then you m
FIRST YEAR
1) Consideration paid = $400,000
2a) Bottom Co. reported income for 2014 ...$30,000
2b) - Amortization of excess fair value ...(2,500)
2c) Deferred Gross Profit from Bottom's 2014 upstream sales... (4,000)
3) This equals Bottom Co. Adjusted 201
Because the intra-entity sales are upstream, the $4,000 beginning unrealized gross
profit (Entry *G ) adjustment no longer involves a
debit to the parent's Investment in Bottom Account
Top and Bottom, as separate legal entities, maintain _____________________; thus, Bottom recorded its upstream transfer sale as
independent accounting information systems; it recorded the upstream transfer sale as a regular sale
1) Because $16,000 at the end of 2014 of transfers remain in Top's inventory, $4,000 of GP (25%) is considered _______ from a consolidated perspective.
2) What is the entry to reduce Bottom Company's January 1, 2015 balance as a result of the remaining tr
1) considered unearned from a consolidated perspective
2) (debit) Retained Earnings ...4,000
(credit) COGS .... 4,000
(calculated as 25% GP x $16,000)
Differences between Net Income attributable noncontrolling interest for Downstream vs. Upstream worksheet
Downstream: $13,500
Upstream: $13,100
The reason for the $13,100 in upstream is b/c the subsidiary's $70,000 income is decreased fo rhte $6,000 GP deferred into the next year and increased for $4,000 from GP deferred from the previous year. After further
CONSOLIDATION ENTRY S - what does it do?
Eliminates a portion of the parent's investment account and provides the initial noncontrolling interest balance
CONSOLIDATION ENTRY S - what are the components?
1) Bottom Company Retained Earnings ... 306,000
2) Investment in Bottom ...364,800
3) Noncontrolling interest in Bottom Company, 1/1/15
4) Bottom Company Common Stock
CONSOLIDATION ENTRY S -
1) what is the journal entry
2) What is the combined equity elimination figure given these figures:
Common Stock - Bottom ...150,000
Retained Earnings - Bottom ... 306,000
Investment in Bottom ... 364,800
Noncontrolling Interest ..
1) (debit) Common Stock - Bottom ...150,000
(debit) Retained Earnings - Bottom ... 306,000
(credit) Investment in Bottom ... 364,800
(credit) Noncontrolling Interest ....... 91,200
2) Combined equity elimination figure is $456,000 ( Common Stock Bottom, $
For significant (20-50% ownership) investments, an investor company defers unrealized intra-entity gross profits only to the extent of ______, regardless of
its percentage ownership, regardless of whether the profits resulted from upstream or downstream transfers
In contrast to equity method downstream GP recognition for the parent, how are unrealized GPs recognized differently when a parent has control, versus when it just has significant influence (20-50%)?
When control (rather than just significant influence) exists, 100% of all intra-entity gross profits are removed from consolidated net income, regardless of the direction of the underlying sale (see previous flash card)
1) When the parent is the seller in an intra-entity transfer, what is the justification to allocate a portion of the GP deferral to the noncontrolling interest?
2) In contrast, for an upstream sale, how does the subsidiary recognize GP on its books?
1) there is none
2) Because the noncontrolling interest owns a portion of the subsidiary (but not the parent), partial allocation of intra-entity gross profit deferrals and subsequent recognitions to the noncontrolling interest is appropriate from upstrea
had the inventory transfers been upstream, both the $4,000 beginning inventory gross profit recognition
(Entry *G ) and the $6,000 unrealized gross profit deferral (Entry G ) would be considered adjustments to
adjustments to Bottom's reported totals. (AKA before adjust net income is totaled, subtracted along with the excess over fair value amortization of the "database", then multiplied by the parents' share of income, 80%)
Because the intra-entity sales are upstream, the $4,000 beginning unrealized gross
profit (Entry *G ) adjustment no longer involves a debit to
the parent's Investment in Bottom account
Consolidation entry *G, at the most basic level, does what?
recognizes the intra-entity GP in beginning inventory as earned in 2015 (the 2nd year)
(debit) RE - bottom ...4,000
(credit) COGS ...4,000
Consolidation Entry S, at the basic level does what?
Eliminates a portion of the parent's investment account and provides the initial noncontrolling interest balance. It also removes the stockholders' equity accounts of the subsidiary as of the beginning of the current year
How does entry *G affect Entry S?
Consolidation Entry S - it affects the below entry, as entry *G reduces (debits) Retained Earnings - Bottom by reassigning the $4,000 GP from year 1 into year 2
(debit) Common Stock - Bottom.... 150,000
(debit) RE - bottom ... $306,000 (310K - 4K, as a re
Entry S's combined debits are referred to as the combined
equity elimination figure ($456,000)
= Common Stock - Bottom, 150K
=RE - Bottom, 306K
= 150K + 306K = 456K
What does the combined equity elimination figure form the basis of?
The 20% noncontrolling interest (456,000 x 20% = 91,200)
AND
the elimination of the 80% parent company investment (456,000 * 80% = 364,800)
In comparing consolidated totals across the worksheets for both UPSTREAM and DOWNSTREAM transfers, note than the consolidated
1)
2)
3)
4)
5)
are all equal
1) income
2) inventory
3) total assets
4) total liabilities
5) equities
are all equal
he sole effect of the direction of the intra-entity inventory transfers (upstream or downstream) resides in the allocation of the
The sole effect of the direction of the intra-entity inventory transfers (upstream or downstream) resides in the allocation of the temporary income effects of profit deferral and subsequent recognition to the controlling and noncontrolling interests
To complete the consolidation, the noncontrolling interest's share of consolidated net income entered on the worksheet as $13,100 is computed as follows:
1) Bottom reported ___
2) Excess fair value ($50,000; 20 year life)
3) 2014 ____
4) 2015 _____
5) equ
(in 2nd year, 2015)
1) Bottom reported net income for 2015 .... $70,000
2) Less: Excess fair-value database amortization ($50,000/20) = (2,500)
3) add: 2014 intra-entity gross profit recognized ...4,000
4) 2015 intra-entity gross profit deferred ... (6,00
Compare the differences in Consolidations of Entry *G for
1) Downstream Transfers versus
2) Upstream Transfers
ENTRY *G
DOWNSTREAM
(debit) Investment in Bottom ...4,000
(credit) COGS ... 4,000
UPSTREAM
(debit) RE - Bottom ...4,000
(credit) COGS ...4,000
Compare the differences in Consolidations of Entry S for
1) Downstream Transfers versus
2) Upstream Transfers
ENTRY S - DOWNSTREAM
(debit) CS - Bottom ...150K
(debit) RE, 1/1/15 - Bottom... 310K
(credit) Investment in Bottom (80%) ... 368K
(credit) Noncontrolling Interest - 1/1/15 (20%) ...92K
ENTRY S - UPSTREAM
(debit) CS - Bottom ... 150K
(debit) RE, 1/1/15 - B
Entry S does what in a downstream transfer (equity method for parent)?
Removes subsidiary's stockholders' equity accounts and portion of investment balance. Book value at beginning of year is appropriate
Entry S does what in an upstream transfer - equity method for parent?
Removes subsidiary's stockholders' equity accounts (as adjusted in Entry *G) and portion of investment balance. Adjusted book value and beginning of year is appropriate.
What additional worksheet adjustment is needed when the parent company utilizes either the initial value method or the partial equity method?
Entry *C
Why is entry *C needed? What do the worksheet adjustments depend on?
It's needed to ensure the consolidated financial statements reflect a full accrual GAAP basis. The worksheet adjustments depend on whether the intra-entity inventories result from downstream or upstream sales.
Consolidation Entry *C is required in periods ____
subsequent to acquisition whenever the parent does not apply the equity method
The *C adjustment converts the parent's beginning ____- to a full-accrual consolidated total
converts the parent's beginning RE to a full-accrual consolidated total
Assume the parent applies the initial value method.
Given that the subsidiary declares and pays dividends of $20,000 in 2014 and $50,000
in 2015, Top records dividend income of $16,000 ($20,000 x 80%) and $40,000
($50,000 x 80%) during these two years.
In
...
What are the main journal entry differences between when the parent utilizes the initial value method and the equity method?
Entries
C and
G for downstream intra-entity sales and upstream intra-entity sales
Consolidation Entry *C journal entry
To accrue its portion of the 2014 increase in Bottom's book value [($30K income less $20K in dividends) x 80%, or $8,000] or record the $2,000 amortization expense for this same period.
Consolidation Entry *C
(debit) Investment in Bottom .... 6,000
(credit) Retained Earnings - TOP 6,000
To convert Top's RE to the accrual basis. Intra-entity sales were downstream and therefore do not affect the adjustment
Do intra-entity inventory transfers affect the previous entry *C if they'er downstream? If not, why?
NO; the gross profits had no impact on the income recognized by the subsidiary
DOWNSTREAM
Under the initial value method, the parent makes no entries in its internal financial
records to adjust for the
intra-entity sales
DOWNSTREAM
Because in the previous example the sales are downstream, the parent's 1/1/15 RE will be _______ from a consolidated view by the unrealized GP recognized from 2014 intra-entity sales;
What entry will correct this?
What does this entry reassign?
overstated;
Consolidation entry *G corrects this overstatement and appropriately recognizes (through credit to COGS) that the profit earned in the current year as follows:
(debit) RE - TOP ...4,000
(credit) COGS ... 4,000
Entry *G simply reassigns the int
UPSTREAM
In this case, the $4,000 intra-entity GP remaining in Top's 2014 ending inventory has been recorded by Bottom as part of its 2014
net income and retained earnings
Upstream Transfers�Consolidation Entries
C and
*G: Parent Uses Initial
Value Method
ASSUME IN 2014:
a) $30,000 income
b) $20,000 dividends
c) 80% parent ownership
d) intra-entity GP remaining in Top's 2014 inventory of $4,000
In this case, the $4,000 intr
0
UPSTREAM
1)Conversion from the initial value method to the equity method:
ASSUME IN 2014:
a) $30,000 income
b) $20,000 dividends
c) 80% parent ownership
d) intra-entity GP remaining in Top's 2014 inventory of $4,000
2) What is the journal entry from this
1) = 6,000 net increase (after intra-entity profit deferral in subsidiary's book value during 2014 x 80%) =
=$4,800
2014 amortization expense (80% x 2,500) =($2,000)
== increase in parent's beginning retained earnings (Entry *C) ==4,800 - 2,000 = $2,800
2
UPSTREAM - Converting Initial Value to Equity method
In applying the initial value method in its financial records, the parent did not recognize the increase in
1)
2)
3)
The worksheet process thus adjusts the parent's
1) subsidiary book value
2) excess fair-value amortization
3) or any effects from intra-entity transfers remaining in inventory
The worksheet process thus adjusts the parent's beginning RE by 2,800 (as an increase)
1)Using the initial value method, the parent makes no entries in its internal financial
records to adjust for the ______.
2)Because in the previous flashcard's Entry *C journal entry example is the result of upstream/initial value method/intra-entity sale
1) intra-entity sales;
2) RE will be OVERSTATED
3) Consolidation Entry *G correct this (below)
(debit) RE - Bottom ..4,000
(Credit) COGS ...4,000
To reassign the intra-entity beginning inventory GP to 2015 from 2014
If the parent had applied the PARTIAL EQUITY METHOD in its internal records, what would change in the consolidation processes previously described for the equity method?
2) What are the differences?
3) Because the parent would have recorded changes in the
1) Very little
2) Primary change would involve inclusion of Entry *C.
3) Would be computed only for (1) previous years' excess fair value over book value amortizations
Intra-Entity Land Transfers
1) The original seller of the land reports a ____
2) at the same time as (1) the acquiring company _____ the inflated transfer price rather than the land's historical cost to the business combination
3) The (answer to 1) is clo
1) gain (losses are rare in intra-entity asset transfers) even though the transaction occurred between related parties
2) the acquiring company capitalizes the inflated transfer price rather than the land's historical cost to the business combination
3) r
how do the individual companies account for sales/purchases of land when land is transferred?
The seller establishes a separate gain account when it removes the land from its books. Because this gain is unearned, the balance has to be eliminated when preparing consolidated statements
what is the journal entry you must do every year, after an intra-entity land transfer, while the land is still on the consolidated company's books?
Entry *G
by repeating entry *G every year for intra-entity land transfers, the consolidated financial statements properly state both ____ and ____ accounts
land and RE accounts
Consolidation Entry TL (year of transfer)
(debit) Gain on Sale of Land.. 40,000
(credit) Land.. 40,000
what does consolidation entry TL do?
removes the effects of intra-entity transfer of land
TL stands for
transferred land
When the original sale of land is downstream and the parent has applied the equity method, the reduction in Retained Earnings is changed to an increase in the (*GL entry)
Investment in Subsidiary Account (as the debit)
remember than it is an INCREASE in the Investment in Subsidiary Account
When the original sale of land is UPstream and the parent has applied the equity method, the increase in investment (*GL entry) account is changed to
a decrease in the Retained Earnings account (the debit entry);
This is b/c the Retained Earnings of the seller (the subsidiary) continue to be overstated even if the parent applies the equity method
If the property is ever sold to an outside party, the company making the sale records a gain or loss based on its
recorded book value
the recorded book value that is recorded when the company sells the land and records a gain or loss is based on the ______;
the gain or loss being recognized is incorrect for what purposes?
internal transfer price
the gain or loss being recognized is incorrect for consolidation purposes
Consolidation Entry *GL (year of sale to outside party)
Assume:
-Hastings acquired land for $60k
-Hastings sold land to Patrick for $100k
-Consequently, the $40,000 unrealized gain was eliminated on the consolidation worksheet in the year of the transfer
(debit) RE (Hastings) ...40,000
(credit) Gain on Sale of Land ...40,000
from what accounts to the depreciation process systematically eliminate?
the asset as well as Retained Earnings
Consolidation Entry TA (Transferred Asset)
(debit) Gain on Sale of Equipment ...30,000
(debit) Equipment ... 10,000
(credit) Accumulated Dep'n 40,000
what does entry TA do?
removes unrealized gain and return equipment accounts to balances based on original historical cost
What does consolidation entry ED do?
eliminate overstatement of depreciation caused by inflated transfer price
How often does consolidation entry ED have to be repeated?
For all of the years of the equipment's life
Consolidation Entry ED journal entry
(debit) Accumulated Dep'n
(credit) Depreciation Expense
What do Consolidation Entry ED and TA accomplish?
1) reinstate the asset's
2) Return the 1/1/14 _________ to the appropriate $60,000 figure by recognizing accumulated dep'n of $40,000
3) Eliminate the $30,000 _________ _____ recorded by Able so that this
1) historical cost of $100k
2) the 1/1/14 book value
3)eliminate the $30k unrealized gain ; so that this intra-entity profit does not appear in the consolidated income statement
4) historical cost
Are consolidation entries TA and ED applicable regardless of whether the transfer was upstream or downstream?
yes
what year do consolidation entries TA and ED occur?
in the year of the transfer
do TA and ED remove the effects of intra-entity transfer from the individual records of the two organizations?
NO; the unrealized gain and excess dep'n remain on the separate books and are closed into RE of the respective companies at year-end
The Equipment account with the related accumulated depreciation continues to hold balances based on the ______, not _______. Thus, for every subsequent period,
the separately reported figures must be adjusted on the worksheet to present the consolidated
t
based on the transfer price, not historical cost.