USA Multiple Entities with Intermingled Expenses and Assets

[KerryBarnhart]

I just was brought in to help a company with a situation I've never dealt with, so I am looking for some guidance.

There are 3 main seperate legal entities. The first (A) is a holding company, where the initial investment was brought in. The second (B) is an engineering and fabrication company who's expenses and labor is being used to construct a manufacturing plant. The third (C) is the actual manufacturing plant. Company A will buy inventory from Company C and sell it to the the actual customers. Company B will bill company A for their fabrication costs, as well as later billing outside companies for it's engineering services.

The problem I have is everything has been paid from the bank account of company A. It paid for payroll of the other companies, expenses, capital investment, etc. Now I need to find a way to show the plant assets built at company B for company C on company C's balance sheet.

My initial thought would be to setup an intercompany accounts, but wouldn't that require an actual transfer of cash? There was an initial investment of 25 million dollars into company A which has been spent building out company C. I need to transfer the assets to company C legally.

Any advice is greatly appreciated!

 

[BIG E]

When B incurs expenses for C , there should be a receivable set up for those expenses. There should be a corresponding payable set up for B when B bills C. Those costs eventually become a fixed asset of C.
C should keep accurate records of its manufacturing costs for A's inventory purchases and record it as a receivable. A should record that as a payable and record Inventory cost as an asset. When it sells inventory then that is then transferred to Cost of Good Sold.
The problem you have is commingling of assets due to common ownership. Each entity should be cost tracking its own expenses with its own assets (bank account).

 

[KerryBarnhart]

So, the problem I am running into is how to alleviate the corresponding intercompany AR/AP accounts without a transfer of cash. Would I just debit FA of C and credit the receivable? Is that compliant?

 

[BIG E]

You can't it involves the transfer of cash to clear the intercompany accounts.
The problem is complicated by A holding onto the cash for all 3 entities.
That's NOT compliant with sound financial accounting.

 

[KerryBarnhart]

Right. I'm hoping to get some advice on how to correct this situation.

 

[Kat Maple]

Hi Kerry

Question
"everything has been paid from the bank account of company A"
and
" Company B will bill company A for their fabrication costs, " -----meaning fabrication of the plant?
Question: if A has paid for the plant construction, why is B going to bill A for fabrication of the plant? (Unless B actually paid for the fabrication of the plant??
Can you please clarify

Thanks!

Kat

 

[KerryBarnhart]

Yes, B did all of the fabrication of the plant (C). They will bill for their parts and labor in order to show their costs seperately. This will be a seperate entity, with seperate interested parties. They will have their own revenue streams later on for engineering and fabrication to build other plants around the world (outside companies).

 

[Kat Maple]

Hi Kerry
I am asking
If Co A paid for everything already then how can Company B bill Company A for the plant fabrication? In that case Co A will pay twice for the same thing. Please clarify

Thanks

Kat

 

[ella_bella]

I have seen this in insurance accounting, and they would create intercompany accounts (one for the insurance company, and another for the insurance agency). These accounts would legally transfer money from one to another accordingly. Since you're dealing with large figures, I would ask permission from management to get a CPA to answer it will incur a billing. I'm currently studying for the exam using UWorld Roger, and also know from past experience as an accountant that I've relied on CPA firms for difficult questions like this.