Techincal Accounting Question
I was hoping to get some insight into working paper adjustments.
Could someone please explain the idea of reciprocity in the working papers as it pertains to consolidation? i'll use an intercompany sale as an example.
Let's say there exactly one year ago, there is an upstream sale of PPE which results in a 100 gain. The PPE had at that time 10 years of useful life remaining.
One of the working paper adjustments would be
Dr. Investment in Sub 80
Dr. minority interest 10
Dr. Accumulated depreciation 10
Cr. PPE 100
My question is regarding the reasoning behind this entry. I know it has something to do with reciprocity, but am unclear on what this means. Thanks in advance.
Is this a genuine question or a joke?
Minority interest is indeed an accounting concept, but would never appear in a journal entry. Minority interest is by definition a market value concept, so increasing minority interest on the balance sheet via a cost based journal entry makes no sense.
It is not a journal entry; it is a working paper entry.
Regardless of the name of the entry, this is not a joke. I can assure you that minority interest would indeed exist as an entry in a consolidation adjustment and that companies do them whenever an acquisition is made.
Furthermore, this is not a cost-based entry. It is in fact a market based entry; the underlying gain in the example stems from the fact that you sold the there is an intercompany sale of PPE at a market price that is 100 higher than the amortized cost value on the books.
To be fair, this is not a banking question per se (as I posted it in the I-Banking Bullpen, that may have been my mistake). However, understanding working paper adjustments allows you to understand M&A accounting better.
Journal entries are definitely made for minority interest - it shows up on the balance sheet.
The entry you described has me confused. Is this the entry made at the sub or the parent? If the sub is consolidated into the parent I doubt that GAAP lets you create an overall gain by selling property to yourself. Even if the sub has its own minority holders, a gain on sale at the sub level would raise net income, and create more minority interest at the sub, not less. Also intercompany entities aren't recorded as an investment in subsidiary, they are rolled up into the consolidated balance sheet.
So I'm confused, but not saying you are wrong per se.
Neither the parent alone nor the sub alone makes these entries on their journal entries (in that sense jhoratio is correct). These specific entries only arise in the process of consolidating a sub's financials with the parent's financials (assuming 50%+ ownership), so I guess in that sense the parent makes these entries, but again, it is NOT on the isolated parent books alone.
Intercompany entities are initially accounted for in an equity accounting method, then each year they are consolidated (assuming ownership is 50%+). What you see when you look at a 10-K is that consolidated set of financials. In other words, at some point (usually year end), the parent does roll it up into a consolidated B/S; working paper adjustments constitute this process in which they roll it up.
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