Adjusting entries consolidating statements

Foreign-currency gains and losses on intercompany accounts that are essentially permanent are excluded from the determination of net income and instead are recorded as OCI.In essence, if the intercompany account is essentially a permanent investment in the subsidiary, the gain or loss on that account should be excluded from net income.

Normal intercompany accounts will generate a gain or loss that is ordinarily reflected on the books of the subsidiary operating in a functional currency other than the reporting currency of the parent company.

The first common mistake is difficult to detect without knowing how the accounting system consolidates subsidiaries.

This mistake occurs when a company misclassifies a foreign-currency gain or loss in OCI instead of net income.

Therefore, the German subsidiary must adjust its liability to Parent Company A from €6,961,000 to €7,433,000.

The subsidiary will credit its liability for €472,000.

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