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Consolidated
Financial
Statements
Intra-Entity
Asset
Transactions
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Intra-entity Transactions
Companies that make up a business combination
frequently retain their legal identities as separate
operating centers and maintain their own recordkeeping.
Inventory sales between the companies must be recorded.
The seller records revenue, and the buyer enters the
purchase into its accounts.
For internal reporting purposes, recording an inventory
transfer as a sale/purchase provides vital data to help
measure the operational efficiency of each enterprise.
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Intra-entity Transactions
From a consolidated perspective neither a sale nor a purchase
has occurred. An intra-entity transfer is merely the internal
movement of inventory that creates no net change in the
financial position of the business combination taken as a
whole.
In the consolidated financial statements, the transfers are
eliminated.
The consolidated statements reflect only transactions with
outside parties.
Worksheet entries report the perspective of the consolidated
enterprise.
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Intra-entity Transactions
Downstream Transfers
Entry *G if the transfer of inventory is downstream AND the
parent uses the equity method, the following entry is used to
recognize the remaining unrealized profit left at the end of the
previous year.
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Entry *G removes unrealized gross profits (25% rate) carried over from the
previous period intra-entity downstream sales. Entry *G reduces Cost of
Goods Sold (or beginning inventory component) which creates an increase
in current year income. Gross profit is correctly recognized in 2015 when
inventory is sold to an outside party. The debit to the Investment in Bottom
account brings that account to a zero balance in consolidation.
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Intra-entity Transactions
Inventory Transfer
Upstream
Intra-entity Transactions
Upstream Inventory Transfer
The records of the two companies change to reflect the
parents application of the equity method for
upstream sales.
(Entry *G) reduces Bottoms beginning 2015 Retained
Earnings balance, and decreases Cost of Goods Sold
which increases consolidated net income to recognize
profit earned in 2015 by sales to outsiders.
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Intra-entity Transactions
Upstream Inventory Transfer
As of January 1, 2015, $16,000 of transfers remain in
Tops inventory, and $4,000 of gross profit (25%) is unearned
from a consolidated perspective. Also, Bottoms beginning
Retained Earnings are overstated by $4,000, the gross profit
from 2014 intra-entity transfers.
Intra-entity Transactions
Upstream Inventory Transfer
Entry S eliminates a portion of the parents investment account
and provides the initial noncontrolling interest balance.
The entry also removes stockholders equity accounts of the
subsidiary as of the beginning of the current year.
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Intra-entity Transactions
Upstream vs. Downstream transfers
Compare the Entry *G for the downstream and upstream
transfers to see the difference in the transactions.
Intra-entity Transactions
Upstream vs. Downstream transfers
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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.
The original gain was closed to R/E at the end of that period. To
eliminate the gain in subsequent years, it must come from R/E.
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UPSTREAM transfers
have a gain on the
SUBSIDIARY books!
All noncontrolling
interest balances are
based on the subs net
income EXCLUDING
the intra-entity gain.
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