Compare Arm’s Length Transactions vs Non-Arm’s Length Transactions and explain the necessity of eliminating intercompany transactions
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1. On December 31, 2020, Parent company (A) acquired 80% of Subsidiary (B) outstanding common stocks for SR 368,000, Subsidiary’s fair value of net asserts was SR 460,000. During 2021, subsidiary net income and dividends declared were 100,000 and 50,000 respectively. Begging balance forAccumulated depreciation of subsidiary‘s equipment amounted to SR 50,000. Parent uses non-pushdown accounting and equity method .Subsidiary‘s fair value of net assets were as follows
|
Book Value Element |
Amount in SR |
||
|
Common Stock |
150,000 |
||
|
RetainedEarning |
120,000 |
||
|
Total |
270,000 |
||
|
Under –Or Over Valuation |
|||
|
Inventory |
(10,000) |
2 Months |
|
|
Land |
50,000 |
No Useful Life |
|
|
Equipment |
100,000 |
4 Years |
|
|
Total Under –Or Over Valuation |
140,000 |
||
|
Good Will |
50,000 |
No Useful Life |
|
|
Total Under –Or Over Valuation |
490,000 |
Required:
- Pass journal entries to record basic elimination entries.
- Pass journal entries to record the excess value reclassification entry
- Pass journal entries to record the amortized excess value reclassification entry
- .Pass journal entries to record the depreciation elimination entry if accumulated depreciation account based on book value of assets is 25,000.
Answer:
2. Compare Arm’s Length Transactions vs Non-Arm’s Length Transactions and explain the necessity of eliminating intercompany transactions
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