Chapter Five

Consolidated
Financial
Statements –
Intra-Entity
Asset
Transactions
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
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Intra-entity Transactions

 Transactions between the parent and

subsidiary are considered “internal”
transactions of a single economic
entity.
 The effects of these intra-entity
transactions should be eliminated
from the consolidated financial
statements.
 Thus, consolidated statements
only reflect transactions with
outside parties.
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Intra-entity Transactions –
Inventory Transfers
ENTRY TI
Eliminate all intra-entity sales/purchases of
inventory, by eliminating the sales price of the
transfer – which one company recorded as sales,
and the other recorded as cost of goods sold.
CONSOLIDATION RECORD Page ##
Date Description Debit Credit
Sales $$$
Cost of Goods Sold $$$
ENTRY TI (Eliminates "transferred inventory")

Note: Assuming inventory has been re-sold to a

third-party, both companies have debited COGS
and credited Sales for the same inventory.
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Intra-entity Transactions –
Inventory Transfers
ENTRY G
Despite Entry TI, ending inventory is still
overstated by the amount of gain on any
inventory that remains unsold at year end.
We must eliminate the unrealized gain as follows:
CONSOLIDATION RECORD Page ##
Date Description Debit Credit
Cost of Goods Sold $$$
Inventory $$$
ENTRY G (eliminates gain)

Note: Any inventory that was ‘marked-up’ in

an I/C transfer must be returned to it’s original
cost if it has not been sold to an outside party.
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Intra-entity Transactions –
Inventory Transfers
ENTRY *G
In the year that the inventory is subsequently sold
to a third party, the I/C gain is in beginning
Retained Earnings on the seller’s books, and
must be moved to Consolidated Income.
CONSOLIDATION RECORD Page ##
Date Description Debit Credit
R/E (Beg. Bal. of seller) $$$
COGS (Beg. Inv. Component) $$$
ENTRY *G

Note: The separate records of each company still

contain the I/C transactions, including any gain
that was recorded at the time it occurred.
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Unrealized Inventory Gain -
Other issues
Does it matter if the sale is
Upstream or Downstream?
YES!!

 If it’s DOWNSTREAM, then any

unrealized gain belongs to the parent.

 If it’s UPSTREAM, then any unrealized

gain belongs to the subsidiary.
 We will reduce the Sub’s net income by the
unrealized gain prior to calculating the
noncontrolling interest’s share.
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Intra-entity Transactions –
Inventory Transfers
ENTRY *G
If the transfer of inventory is downstream AND
the parent uses the equity method, then the
following entry is used to recognize the
remaining unrealized profit left at the end of
the previous year.

CONSOLIDATION RECORD Page ##

Date Description Debit Credit
Equity in Subsidiary Income $$$
COGS (Beg. Inv. Component) $$$
ENTRY *G

Note: This properly eliminates the gain from

the Equity in Sub Income account and moves
it to the Parent’s operating income accounts.
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Intra-entity Transactions –
Land Transfer
ENTRY TL
If land is transferred between the parent and
sub at a gain, the gain is considered
unrealized and must be eliminated.

CONSOLIDATION RECORD Page ##

Date Description Debit Credit
Gain on Sale of Land $$$
Land $$$
ENTRY TL

Note: By crediting land for the same amount,

this effectively returns the land to its
carrying value on the date of transfer.
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Intra-entity Transactions --
Land Transfer
ENTRY *GL
As long as the land remains on the books of
the buyer, the unrealized gain must be
eliminated at the end of each fiscal period.
CONSOLIDATION RECORD Page ##
Date Description Debit Credit
R/E (Beg. Bal. of seller) $$$
Land $$$
ENTRY *GL

Note: The original gain was closed to R/E at the

end of that period. When we eliminate the gain
in subsequent years, it must come from R/E.
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Intra-entity Land Transfers
Eliminating Unrealized Gains
ENTRY *GL (Year of sale)
In the period the land is sold to a third party,
the unrealized gain must be eliminated one
more time, and also finally recognized as a
REALIZED gain in the current period’s
consolidated financial statements.
CONSOLIDATION RECORD Page ##
Date Description Debit Credit
R/E (Beg. Bal. of seller) $$$
Gain on Sale of Land $$$
ENTRY *GL (Year of sale)

Note: Modify the entry to credit the Gain

account instead of Land.
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The Effect of Land Transfers on
Noncontrolling Interests

DOWNSTREAM
transfers have UPSTREAM transfers
no effect on have a gain on the
noncontrolling SUBSIDIARY books!
interest. All noncontrolling
interest balances are
based on the sub’s
net income
EXCLUDING the
intra-entity gain
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Intra-entity Transactions --
Depreciable Asset Transfers
In Years Following the Year of Transfer
Equipment is carried on the individual
books at a different amount than on the
consolidated books.
The amounts change each year as
depreciation is computed.
To get the worksheet
adjustments, compare
the individual records
to the consolidated
records.
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Intra-entity Transactions --
Depreciable Asset Transfers

On Baker’s (buyer’s) books, the

annual depreciation = $90,000 ÷ 10
yrs. = $9,000 per year.
The 1/1/11 R/E effect = the original
gain of $30,000 on Able’s (seller’s)
books less one year of
depreciation.
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Intra-entity Transactions --
Depreciable Asset Transfers

For the consolidated entity, the annual

depreciation = $48,000 remaining BV ÷ 8
yrs. = $6,000 per year.
The Accumulated Depreciation at 12/31/11 =
$40,000 accumulated depreciation at
12/31/09 + two years of depreciation.
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Intra-entity Transactions --
Depreciable Asset Transfers

The consolidation worksheet

adjustments appear in the
last column.