US-CN Companies & Securities Law Assignment

Intercompany Profit Transactions—Plant Assets 1. What is the objective of eliminating the effects of intercompany sales of plant assets in preparing consolidated financial statements? 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. In accounting for unrealized profits and losses from intercompany sales of plant assets, does it make any difference if the parent is the purchaser or the seller? Would your answer be different if the subsidiary were 100 percent owned? 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 con...

Consolidation Techniques and Procedures 1. If a parent in accounting for its subsidiary amortizes patents on its separate books, why do we include an adjustment for patents amortization in the consolidation workpaper? Under the equity method, a parent amortizes patents from its subsidiary investments by adjusting its subsidiary investment and income accounts. Since patents and patent amortization accounts are not recorded on the parent’s books, they are created for consolidated statement purposes through workpaper entries. 2. How is noncontrolling interest share entered in consolidation workpapers? Noncontrolling interest share is entered in the consolidation workpapers by preparing a workpaper adjusting entry in which noncontrolling interest share is debited and noncontrolling interest is credited. The noncontrolling interest share (debit) is carried to the consolidated income statement as a deduction, and the credit to noncontrolling interest for noncontrolling interest sha...

Intercompany Profit Transactions—Inventories 1. The effect of unrealized profits and losses on sales between affiliated companies is eliminated in preparing consolidated financial statements. When are profits and losses on such sales realized for consolidated statement purposes? Profits and losses on sales between affiliates are realized for consolidated statement purposes when the purchasing affiliate resells the merchandise to parties outside of the consolidated entity. If all merchandise sold to affiliates is resold to outside parties in the same period, there will be no unrealized profit to eliminate in preparing the consolidated financial statements. 2. In eliminating unrealized profit on intercompany sales of inventory items, should gross profit or net profit be eliminated? Gross profit, rather than net profit, is the concept that should be used in computing unrealized inventory profits according to GAAP. 3. Is the amount of intercompany profit to be eliminated fro...

Intercompany Profit Transactions—Bonds Transactions in which a corporation acquires the outstanding bonds of an affiliate on the open market result in constructive gains and losses except when an affiliate purchases bonds at book value. The consolidated entity realizes constructive gains and losses when an affiliate purchases another affiliate’s bonds. The constructive gains and losses should be reflected in the income of the parent (under the equity method) and consolidated net income in the year of purchase. Constructive gains and losses on parent bonds purchased by a subsidiary are similar to unrealized gains and losses on downstream sales and do not require allocation between non-controlling and controlling interests. However, constructive gains and losses on subsidiary bonds purchased by the parent company should be allocated between the controlling and non-controlling interests. Constructive gains or losses on intercompany bonds are recognized on the books of the purchaser and...