Financial Adjustment for Asset Trade Between Subsidiaries (Coursework Sample)

Financial adjustment for asset trade between subsidiaries
Name
Institution
Abstract
Financial accounting is often beset by balancing needs. This is especially true for subsidiaries of the same company in which case depreciable assets trade can neither be identified as a profit or loss. In this case, the consolidated financial accounting must be balanced to reflect neither a loss nor a gain, though this would be reflected in the individual subsidiary company financial books. In addition, the consolidated work sheet entries must address the assets depreciation.
The paper presents the financial adjustments for depreciable asset trade between two subsidiaries. In particular, this paper addressed the principles applied in individual company and consolidated financial books adjustments for the trade and depreciation. The results show that despite the differences in subsidiary company financial records – to reflect the asset trade – the consolidated financial records can be adjusted and balanced.
Keywords: adjusted, consolidated, depreciable asset, financial records, subsidiary
Financial adjustment for asset trade between subsidiaries
Introduction
Depreciable assets are defined as tangible capital whose value depreciates over time (Christensen, Cottrell & Baker, 2013). Within company operations there are occasions when one company has a surplus of depreciable assets and needs to dispose of them. In this case, they could sell the depreciable assets to a subsidiary with a cash transfer against the sale (Hussey, 2010). This situation presents a problem for the balancing of consolidated financial statements since the sale is an inter-corporate transfer and such transactions cannot be reflected in the consolidated financial statements. In fact, the effects of the transaction must be excluded from the financial statements. For that matter, the consolidated financial statements must be adjusted to eliminate the intercompany financial gains and losses, and restore the asset to its original value (Whittington & Delaney, 2011).
Case presentation
Sapling, Inc. is a subsidiary of Fir Enterprises. In reference to that, Fir Enterprises owns a 95% stake in Sapling, Inc. On January 1, 20X8, Sapling, Inc. bought an industrial wood chipper from Fir Enterprises at a cost of $10,000. In this case, the Sapling had purchased the wood chipper at a cost $17,000 with its current book value standing at $8,000. In addition, the wood chipper was projected to have 4 years remaining in its lifespan at the end of which its salvage value would be $0. Given that (for all intents and purposes) the transactions for the wood chipper occurred between conglomerated companies, the transactions would be treated as depreciable asset transactions. With regards to this, unique financial entries – for the wood chipper – would be reflected in the purchasing company, selling company and consolidated financial statements (Fischer, Tayler & Cheng, 2011; Maynard, 2013).
Question 1: Sapling, Inc. financial entries to reflect the purchase of the wood chipper
Sapling, Inc. bought the wood chipper at a cost of $10,000. In this case, the financial book entries for the company on January 1, 20X8, would reflect a wood chipper worth $10,000 being added into the company assets and $10,000 spent in purchasing the wood chipper. In addition, the financial accounts for the company would show that the asset depreciated by $1,000 resulting in an accumulated depreciation value of $1,000 as at December 31, 20X8 (see table 1) (Fischer, Tayler & Cheng, 2011; Maynard, 2013).
Table SEQ Table \* ARABIC 1. Sapling, Inc. financial account book entries in the year of purchase (20x8)
Date

Financial account book entries for Sapling, Inc. purchase of wood chipper from Fir Enterprises on January 1, 20X8

01/01/20X8

Wood chipper cost

$10,000


01/01/20X8

Cash spent to purchase the wood chipper


$10,000


Financial account book entries to record depreciation of wood chipper on the year of purchase (January 1, 20X8 to December 31, 20X8)

12/31/20X8

Depreciation expense for the wood chipper

$1,000


12/31/20X8

Accumulated depreciation


$1,000

Question 2: Fir enterprises financial entries to reflect the sale of the wood chipper
Fir Enterprises sold the wood chipper at a cost of $10,000. In this case, the financial book entries for the company on January 1, 20X8, would reflect cash sale for wood chipper at $10,000. In addition, the accumulated depreciation would stand at $9,000, of which the initial asset purchase cost stood at $17,000 and the gain on sale of the wood chipper stood at $2,000. These entries were made for January 1, 20X8 (see table 2) (Fischer, Tayler & Cheng, 2011; Maynard, 2013).
Table SEQ Table \* ARABIC 2. Fir Enterprise financial account book entries in the year of sale (20X8)
Date

Financial account book entries to record the sale of the wood chipper to Sapling, Inc. on 01/01/20X8

01/01/20X8

Cash to be received upon sale of the wood chipper

$10,000


01/01/20X8

Accumulated depreciation

$9,000


01/01/20X8

Wood chipper


$17,000

01/01/20X8

Gain on sale of wood chipper


$2,000

Question 3: Consolidated worksheet adjusting entries for the year 20X8
The consolidated financial entries would reflect the balanced transactions for the two companies for the year 20X8, since Sapling, Inc. is a subsidiary of Fir Enterprises. In this case, there was a $2,000 gain in the sale of the wood chipper and $7,000 gain in the wood chipper. Conversely, there was an accumulated depreciation value of $9,000. These financial book entries eliminated the unrealized gain and restored the wood chipper to its original cost. On the other hand, the accumulated depreciation for the wood chipper stands at $5,000 in which case the depreciation expense is $5,000 (see table 3) (Fischer, Tayler & Cheng, 2011; Maynard, 2013).
Table SEQ Table \* ARABIC 3. Consolidated financial account book entries for 20X8
Date

Consolidated financial account book entries to remove the unrealized gain and restore asset to its original historical cost

12/31/20X8

Gain on the sale of wood chipper

$2,000


12/31/20X8

Wood chipper

$7,000


12/31/20X8

Accumulated depreciation


$9,000


Consolidated financial account book entries to eliminate excess depreciation based on the subsidiary's transfer price

12/31/20X8

Accumulated depreciation

$5,000


12/31/20X8

Depreciation expense


$5,000

Question 4: Consolidated worksheet entries to address depreciation at the end of 20X9
The worksheet adjustment value for the wood chipper is calculated as $7,000. In this case, the difference between the consolidated record of $17,000 and the individual record at $10,000. Based on the asset entries, the accumulated depreciation, on December 31, 20X9, stands -$11,000 for the consolidated records, -$8,000 for the individual records and -$3,000 for the worksheet adjustment. For that matter, the original accumulated depreciation is $9,000 and the seller depreciation expense is $2,000 for 20X8 and 20X9. In addition, the depreciation expense for the individual records stand at $1,000, consolidated records stand at $6,000 and the worksheet adjustment stands at $5,000. This would also include $5,000 in the individual records, $6,000 in the consolidated records and $1,000 in the worksheet adjustment to reflect a gain of $2,000 less the first year depreciation value of $1,000 (see table 4) (Fischer, Tayler & Cheng, 2011; Maynard, 2013).
Table SEQ Table \* ARABIC 4. Consolidated worksheet adjustment entries to address the impact of annual depreciation as recorded in the purchasing subsidiary's financial books for the year 20X9
Account

Individual records

Consolidated records

Worksheet adjustment

Explanation

Wood chipper 12/31/...