From a consolidated perspective does a intra-entity sale/purchase actually happen?
No because we eliminate the intra-entity transfer so it doesn't show up in the consolidated statements
What is the definition of an intra-entity transfer?
The internal movement of inventory that creates no net change of the business combination
If a parent sells to the sub, what is the original entry the PARENT would make?
Parent Original Entry:
Dr: Cash
Cr: Sales
Dr: COGS
Cr: Inventory
**No matter if upstream or downstream...
the sales from intra-entity transfers NEEDS to be eliminated
What is Entry TI?
The Transfer Inventory:
Dr: Sales
Cr: Cost of Goods Sold
(eliminates the purchase)
Despite Entry TI, what else do we need?
Entry G which eliminates the gross profit from the sale.The inflated ending inventory figure causes COGS to be too low and profits/inventory to be too high.
What if a portion of inventory remains or is sold to a third party?
Still do Entry G but the amount is different.
Calculation: (Inventory remaining x GP Ratio)
In a partial inventory transfer..
the unrealized portion of the transfer must be adjusted in 2 successive years
(from ending inventory in the year of transfer to beginning inventory of the next period)
Entry G vs Entry *G...
Entry G - defers the 7500 gross profit
Entry *G - recognizes the 7500 gross profit
Entry *G is different when...
1. Inventory sale is downstream
2. Parent applies the equity method
Dr: Investment in Sub
Cr: COGS
How do you calculate consolidated revenues..
Parent + Sub - Intra-Transfers
How do you calculated consolidated retained Earnings..
If equity method applies, the parent's balance is the same as the consolidated total
How do you calculate consolidated expenses?
Parent
+ Sub
+ Amortization/Depreciation
How do you calculate consolidated total for equipment?
Parent
+ Sub
+ Undervalued amount
- Amortization
How do you calculate consolidated inventory?
Parent
+ Sub
- Unrealized Gross Profit
How do you calculate consolidated sales?
Parent
+ Sub
- Intra-Entity Transfers
How do you calculate Net Income for NCI?
Sub Net Income
+ Recognition of Inventory
- Deferral of Inventory
- Amortization
x Ownership %
In computing the NCI's share of consolidated net income, how should the sub's net income be adjusted for intra-entity transfers?
The sub's reported net income is adjusted for the impact of upstream transfers prior to computing the NCI's allocation
How do you compute consolidated COGS?
-Parent balance
+Sub balance
-Subtract intra-entity transfer 2015
-Subtract recognition of 2014 deferral of GP
+Add deferral of 2015 GP
What is the original entry of the parent when they buy equipment from the sub?
Parent:
Dr: Land
Cr: Cash
What is the consolidated total of NCI on the balance sheet?
NCI beginning Book Value
+ FairValue of Excess
+ Sub Net Income
- Amortization
What is the original entry of the sub?
Sub:
Dr: Cash
Cr: Land
Cr: Gain
What is Entry TL?
Transfer land to eliminate the gain:
Dr: Gain on Sale of Land
Cr: Land
What does entry TL do to the books?
-Eliminates the unrealized gain from the consolidated statements and returns the land to its recorded value at date of transfer
What ends up happening after entry TL?
The gain recorded carries through to retained earnings while the land account retains the inflated transferred price. Therefore the eliminated process is repeated until the land is sold using entry *GL
What is Entry *GL?
Eliminates effects of intra-entity transfer of land made in the previous year
Dr. Retained Earnings
Cr: Land
How is Entry *GL changed when there is a downstream sale and the parent applies the equity method?
Retained Earning is replaced with the Investment in Sub account
What entry is needed when the land is sold to an outside party?
Entry *GL to remove the gain:
Dr: Retained Earnings
Cr: Gain on Sale of Land
Do downstream land transfers have an effect on NCI?
NO
Do upstream land transfer have an effect on NCI?
YES!
-They have a gain on the sub's books.
What is the original entry of the parent when they buy equipment from the sub?
Parent:
Dr: Equpment
Cr: Cash
What is the original entry the sub would make for the equipment sale?
Sub:
Dr: Cash
Dr: Accumulated Depreciation
Cr: Equipment
Cr: Gain
What is entry TA?
Eliminates the unrealized gain and return equipment accounts to balances based on original historical cost
Dr: Gain on Sale
Dr: Equipment
Cr: Accumulated Depreciation
What is entry *TA?
Dr: Retained Earnings
Dr: Equipment
Cr: Accumulated Depreciation
Intra-Entity Asset Transaction
From a consolidated perspective, neither a sale nor a purchase has occurred. It is an internal movement of inventory that creates no net change in the financial position of the business combination as a whole. In the consolidated financial statements, the
Consolidated Entry TI (Xfer of inventory)
Sales (debit) COGS (credit)
This entry elminates the intra-entity xfer of inventory
Entry G
This removes the sellers unrealized Gross Profit from the buyers ending inventory.
This reduces the consolidated inventory account to its original historical cost: This entry also defers the GP. Year 1
Defers Gross Profit in Year 1
COGS (debit) Inventory
G*
Increases consolidated NI (by decreasing COGS) to reflect the earning process in the current year. This entry recognizes GP in year 2
Down Stream Sale
If the parent sells to the subsidiary
Upstream Sale
The subsidiary sells to the parent