Consolidated
Financial
Statements -
Intra-Entity
Asset
Transactions
McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 1
Intra-entity Transactions
5-2
LO 2 Sales and Purchases-
Intra-entity
ENTRY TI (Transferred Inventory)
Eliminate all intra-entity sales/purchases of inventory
by eliminating the sales price of the transfer which
one company records as sales, and the other records
as cost of goods sold.
5-3
LO 3 Unrealized Gross Profit
Intra-entity
ENTRY G (Gross Profit)
Despite Entry TI, ending inventory may still be overstated due to the
transfer price exceeding historical cost. Intra-entity profits that remain
unrealized at year-end must be removed in arriving at consolidated figures.
Unrealized gain is eliminated as follows in Year 1:
5-6
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.
CONSOLIDATION RECORD Page ##
Date Description Debit Credit
Investment in Subsidiary $$$
COGS (Beg. Inv. Component) $$$
ENTRY *G
5-8
Intra-Entity Inventory Transfers
Example
Three entries require attention in the calculation of
noncontrolling interest in the subs net income December 31, 2013.
5-9
Intra-Entity Inventory
Downstream Transfer - Example
Entry TI eliminates the intra-entity sales/purchases for 2013.
5-10
Intra-entity Transactions
Upstream Inventory Transfer
5-11
LO 6 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.
5-13
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 periods 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)
5-15
Intra-entity Transactions --
Depreciable Asset Transfers
ENTRY ED
In addition, the buyers depreciation is based on the
inflated transfer price. The excess depreciation
expense must be eliminated.
5-16