for part A the entry or explaination has to be for the adjustjusting in 2017, no
ID: 2597707 • Letter: F
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for part A the entry or explaination has to be for the adjustjusting in 2017, not 2016.
30. Intercompany transactions Assume that on January 1, 2016, Sub has a patent on its books, with a remaining 10 year life, for S2 million. The sub sells that patent to the parent on Jan. 1,2016, for $10 million in cash. Explain what adjustments will need to be made in consolidation with regard to this transaction - GIVE NUMBERS and accounts (You may give journal entries, or you may instead explain what needs to be done using sentences) a. What, if anything, needs to be adjusted in 2016? (4 points) b. What, if anything, needs to be adjusted in 2020? (4 points) What, if anything, needs to be adjusted in 2030? (4 points) c.Explanation / Answer
a) The book value of Patent in the books of Sub = $2 million
Sale Value of Patent to Parent = $10 million
Profit earned by Sub from Parent (Upstream transaction) = $10 million - $2 million = $8 million
This profit of $8 million needs to be deducted from profits of consolidated income statement in 2016.
The amortization required for patent before sale in the books of Sub = $2 million/10 years = $0.20 million
The amortization in Patent in the books of Parent after sale = $10 million/10 years = $1 million
Therefore the excess amortization of $0.80 million ($1.0 million - $0.20 million) needs to be added back for the consolidation for next 10 years from 2016 to 2025.
a) Therefore the amount of $0.80 million needs to be added to the profit in 2017 for consolidating purposes.
b) Similarly the profit of 2020 is also needs to be adjusted with $0.80 million (added back)
c) There is no adjustment required in 2030 because the patent remaining life at the time of sale was 10 years (i.e. upto year 2025)
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