ADVANCE ACCOUNTING 401 Please help. Thanks

Anonymous
timer Asked: Jul 30th, 2015

Question Description

ACC401_Week5.docx

Work must be 100% original and it must be related to the question.  This is advance accounting 401 Chapter 5  I have attached some notes.

Consolidated Financial Statements – Intra-Entity Asset Transactions" Please respond to the following:

  • Per the textbook, no official FASB guidance exists on the assignment of income effects on non-controlling interest in the consolidation process, when either the parent transfers a depreciable asset to the subsidiary or vice versa. Suggest one (1) method of accounting for the income effects on the non-controlling interest that you consider most appropriate. Provide a rationale for your response.
  • Assume that company P (parent) uses the equity method to account for its investment in company S (subsidiary). Company P purchases inventory items from company S. According to FASB’s guidance, the accountant must remove the inter-company profit from Company S’s net income. Determine if the process permanently eliminates the profit from the non-controlling interest or merely shifts the profit from one period to the next. Provide support for your rationale.

ACC401: Advanced Accounting Week 5: Consolidated Financial Statements – Intra-Entity Asset Transactions Slide# Slide 1 Narration Topic Introduction Welcome to Advanced Accounting. In this lesson we will examine Consolidated Financial Statements – Intra-Entity Asset Transactions. Next slide. Slide 2 Topics The following topics will be covered in this lesson: Intra-Entity Inventory Transactions; Intra-Entity Land Transfers; and Intra-Entity Transfer of Depreciable Assets. Next slide. Slide 3 Intra-Entity Inventory Transactions Consolidation with Intra Entity Transactions - Ch 5 Comprehensive Problem; https://www.youtube .com/watch?v=MjJc -DeAsNA From our previous discussions, we know that intra-entity profits must be eliminated in the preparation of consolidated financial statements. Since one of the main reasons why companies acquire each other is to more fully integrate their supply chain, sale of inventory between companies is common. Embedded in an inventory item’s sales price is an element of profit. The elimination of the accounting effects created by this sales transaction is one of the most significant problems encountered in the consolidated process. Recall our goal in the preparation of consolidated financial statements is presentation for a single economic entity. The sale and purchase of inventory items neither represents a sale or a purchase for the consolidated entity. It is a transfer internally. In order to produce consolidated financial statements, we must remove the recorded effects of these transfers and reflect only transactions with outside parties. We remove the entire impact of the intra-entity transaction with worksheet entries. Removing the sale and the reciprocal purchase is straight forward and does not pose any difficulty. The complication comes into play if the purchaser does not sell all the inventory to an outside party prior to the preparation of consolidated financial statements. Thus included in their ending inventory is an element of profit from the transfer of inventory. Multiple purchases and unsold inventory from those purchases will add another layer of complexity to the consolidation process years later . Additionally, US GAAP allows for the complete elimination of intra-entity profits or the allocation of the elimination of intra-entity profits between the parent and noncontrolling interest. As a basis for illustration, refer to the Comprehensive Illustration - Problem, located in chapter 5 of your textbook and follow along with a comprehensive example problem in the video. Slide 4 Check Your Understanding Next slide. Multiple Choice: Which of the following statement is NOT true about intraentity inventory transactions. • Per FASB, the elimination of the intra-entity gross profits must be allocated between the parent and the noncontrolling interest. • An event that creates no change in the financial position of the business combination taken as a whole. • Any gross profit included in the transfer price does not affect the sales/purchases consolidation worksheet elimination. • The elimination of unrealized gross profit is based only on the amount of transferred merchandise retained within the business at the end of the year. • Correct. The statement is false. The FASB has left the door open to alternative approaches. The statement should read, “Per FASB, the elimination of the intra-entity income or loss may be allocated between the parent and the noncontrolling interest.” • Incorrect. The statement is true. Taken as a whole, an intra-entity inventory transaction is merely moving the inventory around internally. • Incorrect. The sales/purchases transaction must be completely eliminated and is not affected by the elimination of the gross profit remaining in the ending inventory. This is a separate elimination entry on the worksheet. • Incorrect. The only unrealized gross profit remaining is contained in the transfer price of the merchandise remaining in the ending inventory at the end of the period. The merchandise that was sold to an outside party through the course of business is realized gross profit. Next slide. Slide 5 We now move our discussion from the transfer of inventory between members of the consolidated group to the sale of land between members of a consolidated entity. In many ways, the accounting for intra-entity land transfers on the consolidation worksheet partially mirrors that of the Advanced transfer of inventory. The seller of the land would report a gain, as rarely if ever, is land sold at a loss. The purchaser Accounting: of the land would record the land on their books at its fair Eliminating Land value rather than the land’s historical cost. Thus, in the Profits; first year, the gain would have to be eliminated along with https://www.youtube the appreciation part of the amount recorded for the .com/watch?v=nrx_ purchase of the land on the purchaser’s books. Since the Ts_uHJE&list=PL80 gain is closed to Retained Earnings at the end of the 40C722BCAA9174 accounting period, every year subsequently that the land was still owned by the consolidated entity, the buyer’s &index=8 Land account would have to have the appreciation removed and the seller’s Retained Earnings account would have to have the unrealized profit removed. If the land were eventually sold to a third party, the unrealized gain becomes realized. Intra-Entity Land Transfers Let’s view a video of a simple example of a land sale from a parent to a subsidiary and that same sale from the subsidiary to the parent. Next slide. Slide 6 Intra-Entity Transfer of Depreciable Assets Just like members of a consolidated entity transfer land, they may also transfer other assets, such as equipment, patents, franchises, and buildings. Accounting for these type transfers differ somewhat from that demonstrated for a land transfer. These do add a layer of complexity. Assets like equipment and buildings have an annual allocation of cost charged against income known as depreciation. Advanced Patents and franchises have an annual allocation of cost Accounting: charged against income known as amortization. The Eliminating unrealized gain created by the transaction must sill be Depreciable Asset eliminated along with any asset overstatement greater than Profits; original cost. Since subsequent depreciation is based on https://www.youtube the transfer price, which is generally that of fair market .com/watch?v=jJ0C value for the asset, future depreciation expense will be 1bsBEz8&list=PL80 overstated for the remaining useful like of the asset. This 40C722BCAA9174 excess depreciation is systematically reducing the asset’s &index=9 carrying value to more closer to the asset’s historical cost. Additionally, since depreciation expense is closer to Retained Earnings, the overstatement in Retained Earnings is being systematically reduced by the depreciation expense. The production of consolidated financial statements requires the elimination of any remaining gain relative to the asset transfer recorded in Retained Earnings and a corresponding elimination of any remaining appreciation recorded in the asset account. Let’s view a video demonstration of the accounting entries necessary in consolidation for depreciable asset transfers from parent to subsidiary and using the same numbers from subsidiary to parent. Remember the allocation to noncontrolling interest in subsidiary to parent demonstrated in the video is the most common approach. The FASB has not provided any official guidance in this area. Next slide. Slide 7 Check Your Understanding True/False: From a consolidated perspective, depreciation expense on an intra-entity transfer of a depreciable asset eliminates all effect of the transfer from both the asset balance and the Retained Earnings balance over the remaining life of the asset. True: Since the depreciation expense is based on the transfer price which includes the unrealized gain, over the remaining life of the asset the depreciation expense will remove completely the effects of the transfer from both the asset balance and the Retained Earnings balance. Slide 8 Summary We have reached the end of this lesson. Let’s take a look at what we have learned. We started off the lesson by learning about Intra-Entity Inventory Transactions. We discussed why sale and purchase of inventory are common and how each item’s sales price has an element of profit embedded. We learned that for the consolidated entity, the transaction was neither a sale or a purchase, but merely the internal movement of inventory. We discussed the steps necessary to remove effects of intra-inventory transactions from the consolidated financial statements. We learned that we have to eliminate the sale and purchase transaction completely and we have to eliminate any unrealized profit from the ending inventory. Next we discussed Intra-Entity Land Transfers and their effects on the consolidated financial statements. We learned that the transfer results in the land being recognized at fair value on the purchaser’s books and the seller’s having recognized a gain on the sale. Since the land has not left the consolidated entity, there is no gain and the land should be valued at its historical cost. We discussed the elimination entries necessary to accomplish this financial statement presentation. Finally, we discussed Intra-Entity Transfer of Depreciable Assets and their effects on consolidated financial statements. We learned that because these assets have an annual allocation of cost charged to income, known as depreciation, their transfer within the consolidated entity adds another layer of complexity to the consolidation process. We discussed the consolidation worksheet entries necessary to eliminate the effect of an intra-entity transfer of a depreciable asset. First, the unrealized gain created by the transaction must be eliminated along with any asset overstatement greater than original cost. Each period the overstatement in Retained Earnings as a result of the excess depreciation charge has to be eliminated along with a reduction of the accumulated depreciation. This concludes this week’s lesson.

This question has not been answered.

Create a free account to get help with this and any other question!

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors