Chapter 5 consolidation intra entity PDF

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Professor Laura Lamb, Lecture 5 notes, contains bulleted list of important topics covered....

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Advanced accounting chapter 5: Consolidation- intra-entity transactions  Intra-entity profits cannot be recognized until the goods are ultimately sold to an unrelated part or consumed in the production process  For internal reporting purposes- recording an inventory transfer as a sale/purchase provides vital data to help measure the operational efficiency of each enterprise  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 combo as a whole Consolidation entry TI (to eliminate effects of intra-entity transfer of inventory): debit sales (amount of inventory), credit cost of goods sold  However, even gross profits resulting from intra-entity transactions must be removed in the consolidation process  For example- company A sells to their subsidiary company B inventory for 80k, however, company A bought for 50k- so, because of the 30k difference (EVEN AFTER ENTRY TI): ending inventory remains overstated by 30k and gross profit is artificially overstated by 30k. Cost of goods sold computation::::: Beginning inventory purchases – goods available – ending inventory - cost of inventory not sold Consolidation entry G (yr of transfer, all inventory remains)(to remove gross profit in ending inventory created by intra-entity sales)- debit cost of goods sold (30k *see above*), credit inventory  Consolidation entry G is based only on the amount of transferred merchandise retained within the business at the end of the year Consolidation entry G (yr of transfer, 25% inventory remains)- debit cost of goods sold ([30k/80k]*remaining inventory), credit inventory  Whenever intra-entity profit is present in ending inventory: the effects of this deferred gross profit is carried into the beginning balances for the subsequent year. Consolidation entry G (yr following transfer, 25% inventory remains)(to remove from retained earnings the gross profit in beginning inventory and to currently recognize the profit through a reduction in cost of goods sold)::::::::: debit retained earnings (beg. Balance of seller), credit COGS (beginning inventory component) Consolidation entry G (yr following transfer) (ONLY for downstream sales when the equity method is used, replaces *above*)::::::: debit investment in subsidiary, credit COGS  For intra-entity beginning inventory profits resulting from downstream transfers when the parent applies the equity method: the parents beginning retained earnings reflect the

consolidated balance from application of the equity method and need no adjustment, the parent’s investment in subsidiary account as of the beginning of year 2 contains a credit from the deferral of year 1 intra-entity downstream profits, worksheet entry G debits the investment account and credits COGS- effectively recognizing the profit in the year of sale to outsiders gross profit rate (GPR) = gross profit/sales OR MC/1+MC markup on cost (MC) = gross profit / cost of goods sold OR GPR/1-GPR intra-entity profit = transfer price * GPR  The amount of intra-entity profit or loss to be eliminated is NOT affected by the existence of a noncontrolling interest  However, the elimination of intra-entity income or loss may be allocated between the parent and noncontrolling interests  For example- companies can choose for the noncontrolling interest’s share of consolidated net income to be their ownership % * subsidiary net income OR their ownership% * subsidiary net income – intra-entity ending inventory profit deferral The development of consolidated totals affected by intra-entity:   

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Revenues- parent and subsidiary balances are combined, but intra-entity transfers are removed COGS- intra-entity transfers are removed, decreased by intra-entity gross profit in beginning inventory and increased by intra-entity gross profit in ending inventory Net income attributable to the noncontrolling interest- adjusted for any excess acquisition date fair value amortizations and the effects of intra-entity gross profits from upstream transfers and then multiplied by the % of outside ownership Retained earnings (start of yr)(not equity method)- accruals for entry C must recognize effects on reported subsidiary net income of intra-entity gross profits in beginning inventory that arose from upstream sales in the prior year and prior years excess acquisition date fair value amortizations Inventory- any intra-entity gross profit remaining at year end is removed Noncontrolling interest in subsidiary at end of yr- noncontrolling interest at the beginning of the year + portion of subsidiarys net income assigned to noncontrolling interest – noncontrolling interests share of subsidiary dividends  When inventory transfers are downstream from parent to subsidiary- 100% of the profit deferral and subsequent recognition is allocated to the parents equity earnings and investment account  *usually* when intra-entity transfers are downstream- the noncontrolling interest in subsidiary is not affected and their portion of consolidated net income = net income of subsidiary * ownership % - portion of excess amortization

 When using the equity method for an investment with significant influence (20 to 50% usually)- company defers intra-entity gross profits in inventory only to the extent of its ownership % (regardless of upstream/downstream) Consolidation entry G (equity method, upstream sales)- debit retained earnings (subsidiary), credit cost of goods sold Consolidation entry S (equity method, upstream)- debit common stock (subsidiary), debit retained earnings (subsidiary), credit investment in subsidiary, credit noncontrolling interest  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/noncontrolling interests  When a company uses a different method (partial equity or initial value) most things are the same- only difference is entries C and G Consolidation entry C (initial value, intra-entity downstream)- debit investment in subsidiary, credit retained earnings- parent Consolidation entry G (initial value, downstream intra-entity)- debit retained earnings, parent credit cost of goods sold Consolidation entry C (initial value, upstream intra-entity)- debit investment in subsidiary (net increase from intra-entity profit deferral * ownership % - ownership % * amortization expense), credit retained earnings, parent Consolidation entry G (initial value, upstream intra-entity)- debit retained earnings, subsidiary, credit cost of good sold  For an intra-entity sale of LAND: OG seller of land reports a gain, acquirer capitalizes the inflated transfer price, the gain the seller recorded is closed into retained earnings at the end of the year, buyers land account and the sellers retained earnings account continue to contain the intra-entity gain, the gain on the original transfer is recognized in consolidated net income only when the land is sold to an outside party Consolidation entry TL (yr of transfer)(to eliminate effects of intra-entity transfer of land)- debit gain on sale of land (transfer price – OG cost), credit land  For every subsequent consolidation until the land is eventually sold, the elimination process must be repeated to remove the land Consolidation entry GL (every year following transfer)(to eliminate effects of intra-entity transfer of land made in a previous year)- debit retained earnings (beginning balance of seller), credit land  The reduction in retained earnings in consolidation entry GL is changes to an increase in the investment in subsidiary account when the original sale is downstream and the parent has applied the equity method

Consolidation entry GL (yr of sale to outside party)(to remove intra-entity gain from year of transfer so that total profit can be recognized in the current period when land is sold to an outside party)------ debit retained earnings (seller, sale price – acquired price), credit gain on sale of land  In the presence of a noncontrolling interest- if the original sale was a downstream transaction, neither the annual deferral nor the eventual recognition of the inra-entity gain has any effect on the noncontrolling interest  In the presence of a noncontrolling interest- if the transfer is made upstream- deferral and recognition of gains are attributed to the subsidiary and to the noncontrolling interest  When faced with intra-entity sales of depreciable assets- financial reporting objectives remain the same: defer intra-entity gains, reestablish historical cost balances, recognize appropriate income within the consolidated financial statements  For depreciable asset transfers, the ultimate recognition of any gain on sale typically occurs over a PERIOD of several years Consolidation entry TA (yr of transfer)(to remove intra-entity gain and return equipment accounts to balances based on historical cost)---- debit gain on sale of equipment (sale price – [og price – acc depreciation]), debit equipment (og price – sale price), credit accumulated depreciation Consolidation entry ED (yr of transfer)(to eliminate overstatement of depreciation expense caused by inflated transfer price)---- debit accumulated depreciation ([transfer price/remaining life] – [carrying amount/remaining years]), credit depreciation expense  For every subsequent period- the separately reported figures must be adjusted on the worksheet to present the consolidated totals from a single entity’s perspective Consolidation entry TA (yr following transfer)--- debit equipment, debit retained earnings 1/1/xx, parent, credit accumulated depreciation Consolidation entry ED (yr following transfer)--- debit accumulated depreciation, credit depreciation expense  Entry ED will continue on until the asset has been fully depreciated Consolidation entry TA (yr following transfer, downstream, equity method)- debit equipment, debit investment in subsidiary, credit accumulated depreciation Consolidation entry ED (yr following transfer, downstream, equity method)- debit accumulated depreciation, credit depreciation expense...