Question

An intercompany transaction exists due to the sale of depreciable assets between affiliates. How does this transfer affect the financial statements?

Answer 1

An intercompany transaction involving the sale of depreciable assets between affiliates affects the financial statements in multiple ways, including the balance sheet, income statement, and cash flow statement.

Step-by-step explanation:

An intercompany transaction occurs when one affiliate sells depreciable assets to another affiliate within the same company group. This transfer affects the financial statements in several ways:

1. The sale of depreciable assets between affiliates results in a change in the asset and liability positions on the balance sheet. The selling affiliate will remove the depreciable asset from its balance sheet and record a gain or loss on the sale. The purchasing affiliate will record the depreciable asset on its balance sheet at the purchase price.
2. The transaction also affects the income statement. The selling affiliate will recognize a gain or loss on the sale, which will impact its net income. The purchasing affiliate will start depreciating the asset over its useful life, which will result in an expense.
3. Lastly, the intercompany transaction may impact the cash flow statement if the purchase was made for cash or if it involved borrowing funds.