Advance Key Ch.6 Floyd Essay

3626 words - 15 pages

Chapter 6

INTERCOMPANY PROFIT TRANSACTIONS — PLANT ASSETS

Answers to Questions

1 The objective of eliminating the effects of intercompany sales of plant assets is to reflect plant assets and related depreciation amounts in the consolidated financial statements at cost to the consolidated entity.

2 Consolidation procedures for eliminating unrealized profit on plant assets are affected by the direction of the sale. The full amount of unrealized profit or loss on downstream sales (parent to subsidiary) is charged or credited to the majority interest. In the case of upstream sales, however, unrealized profit or loss is allocated between majority and minority interests. Because there ...view middle of the document...

The issue is not whether 100 percent of the unrealized profit or loss is eliminated, but if the amount eliminated is allocated between majority and minority interests. In the case of an upstream sale of land, 100 percent of the unrealized profit from the sale is eliminated, but the amount is allocated between majority and minority interests in relation to their ownership holdings.

6 Unrealized gains and losses from intercompany sales of depreciable assets are realized through use if the assets are held within the consolidated entity and through sale if the assets are sold to outside parties. The process of recognizing previously unrealized gains and losses through use is a piecemeal recognition over the remaining use life of the depreciable asset.

7 The computation of minority interest expense in the year of an upstream sale of depreciable plant asset is as follows:

| | |Unrealized |Unrealized |
| | |Gain on Sale |Loss on Sale |
| |Income of subsidiary as reported | XXX | XXX |
| |Deduct: Gain on sale of plant assets |- XX | |
| |Add: Loss on sale of plant assets |+ XX | |
| |Add: Piecemeal recognition of gain on sale | | |
| | of plant assets |+ X | |
| |Deduct: Piecemeal recognition of loss on | | |
| | sale of plant assets | |- X |
| |Realized subsidiary income | XXX | XXX |
| |Minority interest percentage | X% | X% |
| |Minority interest expense | XXX | XXX |

8 The effects of unrealized gains on intercompany sales of plant assets are charged against the parent company’s income from subsidiary account in the year of the intercompany sale, with equal amounts being deducted from the investment in subsidiary account. In subsequent years, the income from subsidiary and investment in subsidiary accounts are increased for depreciation on the unrealized gain...

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