Solution Manual Advanced Accounting 12e Beams Ch 6
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Advanced Accounting (AKK301)
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Airlangga University
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Advanced Accounting
Solution manual for questions, exercises, and problems of Advanced Accounting 12e by Floyd A. Beams, Joseph H. Anthony, Bruce Bettinghaus, and Kenneth A. Smith.
Test Bank - Advanced Accounting 13th Edition by Floyd Beams All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank - Advanced Accounting 13th Edition by Floyd Beams, All Chapters Covered ,Latest Edition, ISBN:9780134472140
Test Bank for Advanced Accounting 13th Edition by Floyd Beams, Joseph Anthony, Bruce Bettinghaus, Kenneth Smith, All Chapters |Complete Guide A+
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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
controlling interest. In the case of upstream sales, however, unrealized profit or loss is allocated between controlling
and noncontrolling interests. Because there is no allocation to noncontrolling interests in the case of a 100 percent
owned subsidiary, consolidation procedures are the same for upstream sales as for downstream sales.
3 Unrealized gains and losses from intercompany sales of land are realized from the viewpoint of the selling affiliate
when the purchasing affiliate resells the land to parties outside the consolidated entity. This is also the point at which
the consolidated entity recognizes gain or loss on the difference between the selling price to outside parties and the
cost to the consolidated entity.
4 Noncontrolling interest share is not affected by downstream sales of land because the realized income of the
subsidiary is not affected by downstream sales. In the case of upstream sales of land, the reported income of the
subsidiary is adjusted downward for unrealized profits and upward for unrealized losses to determine realized
income. Since noncontrolling interest share is computed on the basis of realized subsidiary income, the computation
of noncontrolling interest share is affected by upstream sales of land.
5 Consolidation procedures are designed to eliminate 100 percent of all unrealized profit or loss on all intercompany
transactions. The issue is not whether 100 percent of the unrealized profit or loss is eliminated, but if the amount
eliminated is allocated between controlling and noncontrolling 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 controlling and
noncontrolling 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 useful
life of the depreciable asset.
7 The computation of noncontrolling interest share 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
Noncontrollinginterest percentage X% X%
Noncontrolling interest share XXX XXX
8 The effects of unrealized gains on intercompany sales of plant assets are charged against the parent’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 that is recorded on the subsidiary books for downstream sales or
for the parent’s proportionate share for upstream sales. If the unrealized gain relates to land, no entries are needed
until the land is sold to entities outside of the affiliation structure.
9 Intercompany sale of plant assets at loss requires special valuation to ensure that the loss is really not the one that
should be recorded in the seller separate book. Before the transaction occurs, the plant assets should be evaluated
with its fair value. If the fair value is lower than the book value, than the loss should be recorded in the seller
separate book as the result of revaluation, not from the selling transaction.
10 Recognizing unrealized gain or loss from the inventory intercompany transaction used as an operating asset is the
same with recognizing the unrealized gain or loss from the plant assets intercompany transaction. Unrealized gain or
loss is recognized periodically as the asset is depreciated over its useful life or when the asset is disposed.
1 Par’s income from Sam will be decreased by $50,000 as a result of the
following entry:
Income from Sam 50,000
Investment in Sam 50,000
To eliminate unrealized gain on downstream sale of land.
Par’s net income for 2014 will not be affected by the sale since the $50,000
gain will be offset by a $50,000 decrease in income from Sam. The investment
in Sam account at December 31, 2014 will be $50,000 less as a result of the
sale as indicated by the above entry. (The total balance sheet effect is to
reduce land to its cost, reduce the investment account for the profit, and
increase cash or other assets for the proceeds.)
2 The consolidated financial statements will not be affected because the gain on
the sale is eliminated in the consolidated income statement and the land is
reduced to its cost basis to the consolidated entity. A workpaper adjustment
would show:
Gain on sale of land 50,000
Land 50,000
3 Neither Par’s income from Sam or net income for 2015 will be affected by the
2014 sale of land. The investment in Sam account, however, will still be
$50,000 less than if the land had not been sold, even though there are no
changes in the investment account during 2015.
4 The sale of the land will not affect Sam’s net income since it is being sold
at Sam’s cost. However, the sale triggers recognition of the postponed gain on
the original sale from Par to Sam.
Investment in Sam 50,000
Income from Sam 50,000
To recognize the gain deferred in 2014.
Consolidated income will also feel the same impact of the recognition of the
deferred gain.
Investment in Sam 50,000
Gain on sale of land 50,000
1a Controlling Share of Consolidated net income
2011 2012
Pit’s separate income $ 150,000 $ 200,000
Add: Equity in Sir’s income
2011 $40,000 ´ 90% 36,000
2012 $30,000 ´ 90% 27,000
Gain on sale of land (5,000) ---
Controlling share of consolidated net income $ 181,000 $ 227,000
1b Noncontrolling interest share
Sir’s net income ´ 10% $ 4,000 $ 3,000
2a Controlling Share of Consolidated net income
Pit’s separate income $ 150,000 $ 200,000
Add: Equity in Sir’s income 36,000 27,000
Less: Gain on land ´ 90% (4,500) ---
Controlling share of consolidated net income $ 181,500 $ 227,000
2b Noncontrolling interest share
Sir’s net income ´ 10% $ 4,000 $ 3,000
Less: Gain on land ´ 10% (500) ---
Noncontrolling interest share $ 3,500 $ 3,000
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