INTER COMPANY TRANSACTION – NON CURRENT ASSETS

The subsidiary will depreciate this asset by $150,000 and subsidiary retained earnings will be reduced. So far as the subsidiary is concerned, that accounting entry is correct – writing off an acquired asset that cost $300,000 over its 2 year estimated remaining useful life

The parent will also have correctly recorded the sale of that asset to the subsidiary for $300,000 and will have recognised a profit of $100,000

But now we arrive at the year end and the two sets of financial statements are to be consolidated

Of that $100,000 profit that was recognised by the parent, half of it has now been realised as a result of the passage of time, so only $50,000 unrealised profit now needs to be accounted for (over the two years of this asset’s life the full $100,000 would be realised)

So the adjustment that is necessary is:

Dr Parent’s retained earnings $50,000
Cr TNCA $50,000

Now the question remains, whose TNCA is credited?

It doesn’t matter – it’s a consolidation adjustment!

A + B – $50,000 is the same as A – $50,000 + B

But it IS important to get the debit in the correct set of retained earnings. In this case, because it was the parent selling to the subsidiary, the debit is in the parent’s retained earnings

Tough on the nci?

Well, yes! But they should have accepted the parent’s offer when the take-over procedure was still in progress. If you accept that, in the event of a take-over, and you choose not to accept the ‘vulture’s offer’, then you will remain as the nci .

You accept that you are to be deprived of any say in the activities of your company so you then can’t complain simply because you continue to be deprived of any say in the activities of your company

If you can’t stand the heat, get out of the kitchen!