Advanced Accounting
by Debra Jeter and Paul Chaney
Chapter 7: Elimination of Unrealized
Gains or Losses on Intercompany
Sales of Property and Equipment
Slides Authored by Hannah Wong, Ph.D.
Rutgers University
7-0
Intercompany Sales of Land
(Nondepreciable Property)
Parent Company
Land
Downstream Sale
Upstream Sale
Subsidiary
7-1
Financial Reporting Objectives
To defer unrealized intercompany gains
or losses until such property is sold to
parties outside the affiliated group
To present such property in the
consolidated balance sheet at its cost to
the affiliated group
7-2
Upstream Sales - Land
An Example
Purchased
land for
$300,000
80% owned
Subsidiary
Sells land for
$500,000
Parent
Company
Sells to
outside
party for
$550,000
years later
S records gain on sale
of land of $200,000
7-3
Upstream Sales - Land
Cost and Partial Equity Methods
Year of Intercompany Sale - EE
Gain on sale of land
Land
To exclude the unrealized
gain from consolidated
net income
200,000
200,000
To reduce the land to its historical
cost paid by the selling affiliate
7-4
Upstream Sales - Land
Cost and Partial Equity Methods
Years after Intercompany Sale - EE
Parent’s share of the
unrealized gain
Beginning R/E - P ($200,000 x 80%)
Beginning R/E - S ($200,000 x 20%)
Land
Noncontrolling interests’ share
of the unrealized gain
160,000
40,000
200,000
To reduce the land to its historical
cost paid by the selling affiliate
7-5
Upstream Sales - Land
Cost and Partial Equity Methods
Year of Sale to Outside Party - EE
Parent’s share of the
unrealized gain
Beginning R/E - P ($200,000 x 80%)
Beginning R/E - S ($200,000 x 20%)
Gain on sale of land
Noncontrolling interests’ share
of the unrealized gain
160,000
40,000
200,000
To record intercompany gain
on sale of land, which is realized
in the current year
7-6
Upstream Sales - Land
Complete Equity Method
Year of Intercompany Sales - Journal Entry
Equity in subsidiary income
Investment in S
160,000
160,000
To exclude the parent’s
share of the unrealized
gain from equity in
subsidiary income
7-7
Upstream Sales - Land
Complete Equity Method
Year of Intercompany Sale - EE
Gain on sale of land
Land
To exclude the unrealized
gain from consolidated
net income
200,000
200,000
To reduce the land to its historical
cost paid by the selling affiliate
7-8
Upstream Sales - Land
Complete Equity Method
Years after Intercompany Sale - EE
Parent’s share of the
unrealized gain
Investment in S
Beginning retained earnings - S
Land
Noncontrolling interests’ share
of the unrealized gain
160,000
40,000
200,000
To reduce the land to its historical
cost paid by the selling affiliate
7-9
Upstream Sales - Land
Complete Equity Method
Year of Sale to Outside Party - EE
Parent’s share of the
unrealized gain
Investment in S
Beginning retained earnings - S
Gain on sale of land
Noncontrolling interests’ share
of the unrealized gain
160,000
40,000
200,000
To record intercompany gain
on sale of land, which is realized
in the current year
7 - 10
Intercompany Sales
Depreciable Property
Parent Company
Machinery, Equipment
or Building
Downstream Sale
Upstream Sale
Subsidiary
7 - 11
Financial Reporting Objectives
 To defer unrealized intercompany gains or
losses until such property is sold to parties
outside the affiliated group
 To present the depreciable property and
related accounts (accumulated
depreciation and depreciation expense) in
the consolidated balance sheet based on
its historical cost to the affiliated group
7 - 12
Downstream Sales - Equipment
An Example
Purchased
equipment for
$1,350,000
Parent
Company
Sold on 1/1/2002
for $900,000
Parent has recorded
$600,000 Acc. Dep. On the
equipment
90% owned
Subsidiary
Equipment has remaining
useful life of 3 years
Note: it is the parent who records the
intercompany profit, thus the parent’s
income needs to be adjusted in consolidation
7 - 13
Downstream Sales - Equipment
All Methods
Year of Intercompany Sale
The Equipment EE
Equipment (1,350,000-900,000)
Gain on sale of equipment
Accumulated depreciation
To eliminate the unrealized
gain
To restore the equipment
to its historical cost
450,000
150,000
600,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
7 - 14
Downstream Sales - Equipment
All Methods
Year of Intercompany Sale
The Depreciation EE
Accumulated Depreciation
Depreciation Expense
50,000
50,000
To adjust depreciation expense from the recorded amount to
the amount based on the original historical cost of equipment
7 - 15
Downstream Sales - Equipment
Cost or Partial Equity Methods
Years after Intercompany Sale
The Equipment EE
Equipment (1,350,000-900,000)
Beginning retained earnings - P
Accumulated depreciation
To eliminate the unrealized
gain
To restore the equipment
to its historical cost
450,000
150,000
600,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
7 - 16
Downstream Sales - Equipment
Cost or Partial Equity Methods
Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation
Beginning retained earnings - P
Depreciation Expense
Adjustment to prior
years’ depreciation expense
100,000
50,000
50,000
Adjustment to current
year’s depreciation expense
7 - 17
Downstream Sales - Equipment
Complete Equity Methods
Years after Intercompany Sale
The Equipment EE
Equipment (1,350,000-900,000)
Investment in S
150,000
Accumulated depreciation
To eliminate the unrealized
gain from the investment
account
To restore the equipment
to its historical cost
450,000
600,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
7 - 18
Downstream Sales - Equipment
Complete Equity Methods
Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation
Investment in S
Depreciation Expense
Adjustment to prior
years’ depreciation expense
100,000
50,000
50,000
Adjustment to current
year’s depreciation expense
7 - 19
Upstream Sales - Equipment
An Example
Purchased
equipment for 90% owned
Subsidiary
$800,000
Sold on 1/1/2002
for $600,000
Subsidiary has recorded
$300,000 Acc. Dep. on the
equipment
Parent
Company
Equipment has remaining
useful life of 5 years
Note: it is the subsidiary who records the
intercompany profit, thus the subsidiary’s
income needs to be adjusted in consolidation
7 - 20
Upstream Sales - Equipment
Cost and Partial Equity Methods
Year of Intercompany Sale
The Equipment EE
Equipment (1,350,000-900,000)
Gain on sale of equipment
Accumulated depreciation
To eliminate the unrealized
gain
To restore the equipment
to its historical cost
450,000
150,000
600,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
7 - 21
Upstream Sales - Equipment
Cost and Partial Equity Methods
Year of Intercompany Sale
The Depreciation EE
Accumulated Depreciation
Depreciation Expense
50,000
50,000
To adjust depreciation expense from the recorded amount to
the amount based on the original historical cost of equipment
7 - 22
Upstream Sales - Equipment
Cost and Partial Equity Methods
Years after Intercompany Sale
The Equipment EE
To eliminate the parent’s and
noncontrolling interests’ shares of
unrealized gain recorded in prior years
Beginning retained earnings - P
Beginning retained earnings - S
Equipment (800,000-600,000)
Accumulated depreciation
To restore the equipment
to its historical cost
85,000
15,000
200,000
300,000
To restore the accumulated depreciation
to its balance on the date of
intercompany sale
7 - 23
Upstream Sales - Equipment
Cost and Partial Equity Methods
Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation
Depreciation Expense
Beginning retained earnings - P
Beginning retained earnings - P
Adjustment to prior
years’ depreciation expense
40,000
20,000
17,000
3,000
Adjustment to current
year’s depreciation expense
7 - 24
Upstream Sales - Equipment
Cost and Partial Equity Methods
Disposal of Equipment by Purchasing Affiliate
The Disposal EE
Beginning retained earnings - P
Beginning retained earnings - S
Gain on sale of equipment
51,000
9,000
60,000
To include the intercompany profit, which is realized
i
in the current year, in consolidated NI
7 - 25
Upstream Sales - Equipment
Cost and Partial Equity Methods
Noncontrolling Interest in Income
Reported income of S
Unrealized gain on
upstream-sale of equipment
Depreciation adjustment (gain
realized through usage)
Upstream-sale unrealized
profit in ending inventory
Upstream-sale realized profit in
beginning inventory
Adjusted NI of S
x
Noncontrolling %
Noncontrolling interest in income
7 - 26
Upstream Sales - Equipment
Cost and Partial Equity Methods
Controlling Interest in Income
Downstream-sale profit
in ending inventory
Unrealized gain on
downstream-sale of
equipment
Amortization of purchase
differential
Reported income of P
Downstream-sale realized profit
in beginning inventory
Depreciation adjustment (gain
realized through usage)
(Adjusted NI of S) x (P %)
Consolidated income
7 - 27
Upstream Sales - Equipment
Cost and Partial Equity Methods
Consolidated Retained Earnings
P% x (Upstream-sale profit
in P’s ending inventory)
Downstream-sale profit
in S’s ending inventory
P% x (Unrealized gain on
upstream-sale of equipment)
Unrealized gain on downstream
sale of equipment
Accumulative amortization
of purchase differential
Reported R/E of P
P’s share of increase in
S R/E since acquisition
Consolidated R/E
7 - 28
Downstream Sales - Equipment
Complete Equity Method
Year of Intercompany Sale - JE
The Gain JE:
Equity in subsidiary income
Investment in S
85,000
85,000
to adjust subsidiary income downward
for the unrealized gain on sale of equipment
The Depreciation JE:
Investment in S
Equity in subsidiary income
17,000
17,000
to adjust subsidiary income upward for
the gain realized through usage
7 - 29
Downstream Sales - Equipment
Complete Equity Method
Year of Intercompany Sale - EE
The Equipment EE
Equipment
Gain on sale of equipment
Accumulated depreciation
To eliminate the unrealized
gain
To restore the equipment
to its historical cost
100,000
200,000
300,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
7 - 30
Downstream Sales - Equipment
Complete Equity Method
Year of Intercompany Sale - EE
The Depreciation EE
Accumulated Depreciation
Depreciation Expense
250,000
20,000
To adjust depreciation expense from the recorded amount to
the amount based on the original historical cost of equipment
7 - 31
Downstream Sales - EE
Complete Equity Method
Years after Intercompany Sale - EE
To eliminate the unrealized
gain from the investment
account and 1/1 R/E - S
The Equipment EE
Investment in S
Beginning retained earnings - S
Equipment
Accumulated depreciation
To restore the equipment
to its historical cost
85,000
15,000
200,000
300,000
To restore the accumulated
depreciation to its balance on the
date of intercompany sale
7 - 32
Downstream Sales - EE
Complete Equity Method
Years after Intercompany Sale - EE
The Depreciation EE
Accumulated Depreciation
Investment in S
Beginning retained earnings - S
Depreciation Expense
Adjustment to prior
years’ depreciation expense
40,000
17,000
3,000
20,000
Adjustment to current
year’s depreciation expense
7 - 33
Downstream Sales - EE
Complete Equity Method
Disposal of Equipment by Purchasing Affiliate
The Disposal JE:
Investment in S
51,000
Equity in subsidiary income
51,000
To adjust subsidiary income upward for the realized
intercompany gain on sale of equipment
7 - 34
Downstream Sales - EE
Complete Equity Method
Disposal of Equipment by Purchasing Affiliate
The Disposal EE
Investment in S
Beginning retained earnings - S
Gain on sale of equipment
51,000
9,000
60,000
To include the intercompany
profit, which is realized
i
in the current year,
in consolidated NI
7 - 35
Advanced Accounting
by
Debra Jeter and Paul Chaney
Copyright © 2001 John Wiley & Sons, Inc. All rights reserved.
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7 - 36