Slide
7-1
7
Elimination of Unrealized
Gains or Losses on
Intercompany Sales of
Property and Equipment
Advanced Accounting, Fourth Edition
Slide
7-2
Learning Objectives
Slide
7-3
1.
Understand the financial reporting objectives in accounting
for intercompany sales of nondepreciable assets on the
consolidated financial statements.
2.
Explain the additional financial reporting objectives in
accounting for intercompany sales of depreciable assets on the
consolidated financial statements.
3.
Explain when gains or losses on intercompany sales of
depreciable assets should be recognized on a consolidated
basis.
4.
Explain the term “realized through usage.”
5.
Describe the differences between upstream and downstream
sales in determining consolidated net income and the
controlling and noncontrolling interests in consolidated income.
Learning Objectives
6.
Compare the eliminating entries when the selling affiliate is a
subsidiary (less than wholly owned) versus when the selling
affiliate is the parent company.
7.
Compute the noncontrolling interest in consolidated net income
when the selling affiliate is a subsidiary.
8.
Compute consolidated net income considering the effects of
intercompany sales of depreciable assets.
9.
Describe the eliminating entry needed to adjust the
consolidated financial statements when the purchasing
affiliate sells a depreciable asset that was acquired from
another affiliate.
10. Explain the basic principles used to record or eliminate
intercompany interest, rent, and service fees.
Slide
7-4
Intercompany Sales of Nondepreciable Property
When there have been intercompany sales of nondepreciable
property, workpaper entries are necessary to:

Include gains or losses on the sale in consolidated net income
only at the time such property is sold to parties outside the
affiliated group and in an amount equal to the difference
between the cost of the property to the affiliated group and
the proceeds received from outsiders.

Present nondepreciable property in the consolidated balance
sheet at its cost to the affiliated group.
Slide
7-5
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
Upstream Sale
E7-4 (variation): Procter Company owns 90% of the
outstanding stock of Silex Company. On January 1, 2011,
Silex Company sold land to Procter Company for $350,000.
Silex had originally purchased the land on June 30, 2007,
for $200,000.
Procter Company plans to construct a building on the land
bought from Silex in which it will house new production
machinery. The estimated useful life of the building and the
new machinery is 15 years.
Slide
7-6
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
E7-4 (variation): Entries made on the books of each affiliate
to record this intercompany sale in 2011.
Entry on Books of Silex
Cash
Land
Gain on sale
350,000
200,000
Entry on Books of Procter
Land
Cash
350,000
350,000
150,000
Additional Entry for Complete
Equity Method: Proctor Only
Note: No further entries are
recorded on the books of Procter
until the land is sold to outsiders.
Slide
7-7
Equity in income 135,000
Investment in Silex
135,000
To reduce its income from subsidiary
by its share of the intercompany gain
($150,000 x 90%).
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
E7-4: B(1). Prepare the workpaper entries necessary
because of the intercompany sale of land for the year ended
December 31, 2011.
Gain on Sale of Land
Land ($350,000 - $200,000)
150,000
150,000
To eliminate the $150,000 gain reported by Silex Company and to
reduce the land balance from the $350,000 recorded on the books
of Procter to its $200,000 cost to the affiliated group.
Slide
7-8
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
E7-4: B(2). Prepare the workpaper entries for the year
ended December 31, 2012.
Upstream Sale
Slide
7-9
Cost Method and Partial Equity Method
Beg. Retained Earnings – Procter (90%)
Noncontrolling Interest (10%)
Land
135,000
15,000
Complete Equity Method
Investment in Silex Company (90%)
Noncontrolling Interest (10%)
Land
135,000
15,000
150,000
150,000
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
E7-4: Summary Points
1. Proctor (parent) continues to report the land on their
statements at the intercompany selling price of
$350,000. However, in the consolidated balance sheet,
the land is reported at its cost to the affiliated group of
$200,000.
2. If the intercompany seller had been the parent
(downstream sale), the entire $150,000 would go to the
controlling interest, resulting in a $150,000 debit to the
beginning retained earnings of the parent company.
Slide
7-10
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
Sales to Outsiders
E7-6: P Company owns 90% of the outstanding common stock
of S Company. On January 1, 2011, S Company sold land to P
Company for $600,000. S Company originally purchased the
land for $400,000.
On January 1, 2012, P Company sold the land purchased
from S Company to a company outside the affiliated group
for $700,000.
Required:
A. Calculate the amount of gain on the sale of the land that is
recognized on the books of P Company in 2012.
Slide
7-11
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
E7-6: A. Calculate the gain on the sale of the land that is
recognized on the books of P Company in 2012.
Selling price to third party
Cost of land to P Company
Gain recognized by P Company
$ 700,000
600,000
$ 100,000
B. Calculate the gain that should be recognized
in the consolidated statements in 2012.
Selling price to third party
Cost of land to affiliate group
Gain recognized in consolidation
Slide
7-12
$ 700,000
400,000
$ 300,000
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Nondepreciable Property
E7-6: C. Prepare the workpaper entries for the year ended
December 31, 2012.
Cost Method and Partial Equity Method
Beg. Retained Earnings – Procter (90%)
Noncontrolling Interest (10%)
Gain on Sale of Land
180,000
20,000
Complete Equity Method
Investment in Silex Company (90%)
Noncontrolling Interest (10%)
Gain on Sale of Land
180,000
20,000
200,000 *
200,000 *
* Gain recognized in consolidation less gain recognized by P Company
($300,000 - $100,000 = $200,000).
Slide
7-13
LO 1 Financial reporting objectives nondepreciable property.
Intercompany Sales of Depreciable Property
(Machinery, Equipment, and Buildings)
Realization through Usage
A firm may sell property or equipment to an affiliate for a
price that differs from its book value.
From the view of the consolidated entity, the intercompany
gain (loss) is considered to be realized from the use of the
property or equipment in the generation of revenue. The use
is measured by depreciation adjustments.
Slide
7-14
LO 4 Intercompany gain realized through usage.
Intercompany Sales of Depreciable Property
(Machinery, Equipment, and Buildings)
When there have been intercompany sales of depreciable
property, workpaper entries are necessary:
 To report only those gains or losses that result from the
sale of depreciable property to outside parties.
 To present property in the consolidated balance sheet at
its cost to the affiliated group.
 To present accumulated depreciation in the consolidated
balance sheet based on the cost to the affiliated group.
 To present depreciation expense in the consolidated
income statement based on the cost to the affiliated
group.
Slide
7-15
LO 2 Financial reporting objectives— depreciable property.
Intercompany Sales of Depreciable Property
(Machinery, Equipment, and Buildings)
Workpaper Elimination Entries
A firm may sell property or equipment to an affiliate for a
price that differs from its book value.
From the view of the consolidated entity, the intercompany
gain (loss) is considered to be realized from the use of the
property or equipment in the generation of revenue.
Slide
7-16
LO 2 Financial reporting objectives— depreciable property.
Intercompany Sales of Depreciable Property
Upstream Sale
P7-1 (Cost or Partial Equity): Powell Company owns 80% of the
outstanding common stock of Sullivan Company. On June 30, 2011,
Sullivan Company sold equipment to Powell Company for $500,000.
The equipment cost Sullivan Company $780,000 and had
accumulated depreciation of $400,000 on the date of the sale.
The management of Powell Company estimated that the equipment
had a remaining useful life of four years from June 30, 2011. In
2012, Powell Company reported $300,000 and Sullivan Company
reported $200,000 in net income from their independent
operations (including sales to affiliates but excluding dividend or
equity income from subsidiary).
Slide
7-17
LO 6 Subsidiary vs. parent as the seller.
Intercompany Sales of Depreciable Property
P7-1: Entries on the books of Powell and Sullivan to record
the intercompany sale are:
Powell Company
Equipment
Cash
500,000
500,000
Sullivan Company
Cash
Accumulated Depreciation
Equipment
Gain on Sale of Equipment
Slide
7-18
500,000
400,000
780,000
120,000
LO 6 Subsidiary vs. parent as the seller.
Intercompany Sales of Depreciable Property
P7-1: A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2011.
2011
Original Cost
Selling Price
Difference
$
$
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)
Equipment
280,000
Gain on Sale of Equipment
120,000
Accumulated Depreciation
400,000
To eliminate the intercompany gain and restore equipment to its
original cost to the consolidated entity.
Slide
7-19
LO 6 Subsidiary vs. parent as the seller.
Intercompany Sales of Depreciable Property
P7-1: A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2011.
2011
Original Cost
Selling Price
Difference
$
$
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)
Accumulated Depreciation - Equipment
Depreciation Expense ($30,000/2)
15,000
15,000
To adjust depreciation expense to the correct amount to the
consolidated entity, thus realizing a portion of the gain through
usage.
Slide
7-20
LO 6 Subsidiary vs. parent as the seller.
Intercompany Sales of Depreciable Property
P7-1: A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2012.
2012
Original Cost
Selling Price
Difference
$
$
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)
Equipment (to original cost)
Beg. Retained Earnings - Powell ($120,000 x 80%)
Noncontrolling Interest ($120,000 x 20%)
Accumulated Depreciation - Equipment
280,000
96,000
24,000
400,000
To eliminate prior period intercompany gain and restore equipment to its
original cost to the consolidated entity.
Slide
7-21
LO 7 Computing the noncontrolling interest.
Intercompany Sales of Depreciable Property
P7-1: A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2012.
2012
Original Cost
Selling Price
Difference
$
$
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)
Accumulated Depreciation - Equipment
45,000
Depreciation Expense ($120,000/4)
Beg. Retained Earnings – Powell ($15,000 x 80%)
Noncontrolling Interest ($15,000 x 20%)
30,000
12,000
3,000
To adjust depreciation for the current and prior year on equipment sold to
affiliate.
Slide
7-22
LO 7 Computing the noncontrolling interest.
Intercompany Sales of Depreciable Property
P7-1 (variation): For the Compete Equity Method, the 2012
workpaper entries would have changed as follows:
Equipment (to original cost)
Investment in Sullivan ($120,000 x 80%)
Noncontrolling Interest ($120,000 x 20%)
280,000
96,000
24,000
Accumulated Depreciation - Equipment
Accumulated Depreciation - Equipment
Depreciation Expense ($120,000/4)
Investment in Sullivan ($15,000 x 80%)
Noncontrolling Interest ($15,000 x 20%)
Slide
7-23
400,000
45,000
30,000
12,000
3,000
LO 7 Computing the noncontrolling interest.
Intercompany Sales of Depreciable Property
P7-1 (variation): If this had been a Downstream sale, the
2012 entries would have changed as follows:
Cost or Partial Equity
Noncontrolling interest of 20% would be included in
Beginning Retained Earnings of Powell Company.
Complete Equity Method
Noncontrolling interest of 20% would be included in
Investment in Sullivan.
There is no differentiation between Controlling interest and
Noncontrolling interest with Downstream Intercompany Sales.
Slide
7-24
LO 7 Computing the noncontrolling interest.
Intercompany Sales of Depreciable Property
Year Subsequent to Intercompany Sale
Upstream Sale
P7-6 (Cost Method): Pitts Company owns 80% of the common
stock of Shannon Company. The stock was purchased for
$960,000 on January 1, 2009, when Shannon Company’s retained
earnings were $675,000. On January 1, 2011, Shannon Company
sold fixed assets to Pitts Company for $960,000; Shannon
Company had purchased these assets for $1,350,000 on January
1, 2001, at which time their estimated useful life was 25 years.
The estimated remaining useful life to Pitts Company on 1/1/11 is
10 years. Both companies employ the straight-line method of
depreciation.
Required: A. Prepare a consolidated statements workpaper for
the year ended December 31, 2012.
Slide
7-25
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-6 (Cost Method):
Income Statement
Sales
Dividend income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income
Retained Earnings Statement
Retained earnings, 1/1
Pitts
Shannon
Net income
Dividends declared
Retained earnings, 12/31
Pitts
$ 1,950,000
60,000
2,010,000
1,350,000
225,000
1,575,000
435,000
$
435,000
Eliminations
Debit
Credit
Shannon
$ 1,350,000
60,000 (4)
1,350,000
900,000
150,000
1,050,000
300,000
$
300,000
NCI
15,000
$
60,000
$
15,000
120,000 (2) 290,400
12,000
1,038,000
1,038,000 (5)
435,000
300,000
60,000
15,000
(150,000)
(75,000)
60,000
$ 1,500,000 $ 1,263,000 $ 1,218,000 $ 377,400
1,215,000
(3)
63,000
$ 63,000
Consolidated
Balances
$
3,300,000
3,300,000
2,250,000
360,000
2,610,000
690,000
(63,000)
$
627,000
(1)
1,397,400
(3)
63,000
(4) (15,000)
$ 48,000 $
627,000
(150,000)
1,874,400
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000
Slide
7-26
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-6 (Cost Method):
Balance Sheet
Inventory
Investment in S
Fixed assets
Accum. Depreciation
Total assets
Liabilities
Common stock
Retained earnings
NCI in net assets
$
$
$
Eliminations
Credit
Debit
Shannon
Pitts
225,000
498,000 $
960,000
2,625,000
2,168,100
(612,000)
(900,000)
2,726,100 $ 2,238,000
465,600
760,500
1,500,000
$
450,000
525,000
1,263,000
290,400
390,000
30,000
(1)
525,000
1,218,000
30,000
(5)
(2)
(3)
(2)
NCI
1,250,400
(5)
540,000
(2)
377,400
312,600
3,000
(5)
48,000
285,600
Consolidated
Balances
723,000
$
5,183,100
(2,022,000)
3,884,100
$
915,600
$
760,500
1,874,400
-
(3)
333,600
Total liab. & equity $
Slide
7-27
2,726,100
$
2,238,000
$
2,483,400
$ 2,483,400
$
333,600
3,884,100
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Acquisition date retained earnings - Shannon $ 675,000
Retained earnings 1/1/12 - Shannon
1,038,000
Increase
363,000
Ownership percentage
80%
$ 290,400
1. Investment in Shannon Company
Retained Earnings – Pitts
290,400
290,400
To establish reciprocity/convert to equity
Slide
7-28
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Original Cost
Selling Price
Difference
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)
2. Plant and Equipment
Retained Earnings – Pitts ($150,000 x 80%)
Noncontrolling Interest ($150,000 x 20%)
Accumulated Depreciation
390,000
120,000
30,000
540,000
To reduce controlling and noncontrolling interests for their shares of
unrealized intercompany profit at beg. of year, to restore fixed assets to
its book value to the selling affiliate on the date of the intercompany sale
Slide
7-29
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Original Cost
Selling Price
Difference
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)
3. Accumulated Depreciation
Other Expenses (Depreciation Expense)
Retained Earnings – Pitts ($15,000 x 80%)
Noncontrolling Interest ($15,000 x 20%)
30,000
15,000
12,000
3,000
To reverse amount of excess depreciation recorded during year and to
recognize an equivalent amount of intercompany profit as realized
Slide
7-30
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-6: Prepare the worksheet entries for Dec. 31, 2012.
4. Dividend Income
60,000
Dividends Declared
60,000
To eliminate intercompany dividends
5. Beg. Retained Earnings - Shannon
Common Stock - Shannon
1,038,000
525,000
Investment in Shannon
1,250,400
Noncontrolling Interest
312,600
To eliminate investment account and create NCI account
Slide
7-31
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
Year Subsequent to Intercompany Sale
Upstream Sale
P7-12 (Partial Equity Method): Prather Company owns 80% of
the common stock of Stone Company. The stock was purchased
for $960,000 on January 1, 2009, when Stone Company’s retained
earnings were $675,000. On January 1, 2011, Stone Company sold
fixed assets to Prather Company for $960,000; Stone Company
had purchased these assets for $1,350,000 on January 1, 2001, at
which time their estimated useful life was 25 years. The
estimated remaining useful life to Prather Company on 1/1/11 is 10
years. Both companies employ the straight-line method of
depreciation.
Required: A. Prepare a consolidated statements workpaper for
the year ended December 31, 2012.
Slide
7-32
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-12 (Partial Equity Method):
Income Statement
Sales
Equity in Sub. income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income
Prather
$ 1,950,000
240,000
2,190,000
1,350,000
225,000
1,575,000
615,000
$
615,000
Eliminations
Credit
Debit
Stone
$ 1,350,000
240,000
(1)
1,350,000
900,000
150,000
1,050,000
300,000
$
300,000
NCI
15,000 (3)
$
240,000
Retained Earnings Statement
Retained earnings, 1/1
120,000
1,505,400
Pitts
1,038,000
1,038,000
Shannon
240,000
300,000
615,000
Net income
(75,000)
(150,000)
Dividends declared
$ 1,970,400 $ 1,263,000 $ 1,398,000
Retained earnings, 12/31
$
(2)
15,000
$
63,000
63,000
Consolidated
Balances
3,300,000
$
3,300,000
2,250,000
360,000
2,610,000
690,000
(63,000)
627,000
$
12,000 (3)
(4)
$
63,000
15,000
60,000 (1) (15,000)
87,000 $ 48,000 $
1,397,400
627,000
(150,000)
1,874,400
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000
Slide
7-33
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-12 (Partial Equity Method):
Balance Sheet
Inventory
Investment in Stone
Fixed assets
Accum. Depreciation
Total assets
Liabilities
Common stock
Retained earnings
NCI in net assets
Prather
498,000
$
1,430,400
$
$
$
2,168,100
(900,000)
3,196,500 $
465,600
760,500
1,970,400
$
Eliminations
Credit
Debit
Stone
225,000
390,000
30,000
2,625,000
(612,000)
2,238,000
(2)
(3)
1,250,400
180,000
540,000
NCI
(4)
(1)
Consolidated
Balances
723,000
$
-
(2)
$
$
450,000
525,000
1,263,000
525,000
1,398,000
30,000
(4)
(2)
87,000
312,600
3,000
(4)
48,000
285,600
(3)
333,600
Total liab. & equity $
Slide
7-34
3,196,500
$
2,238,000
$
2,373,000
$ 2,373,000
5,183,100
(2,022,000)
3,884,100
915,600
760,500
1,874,400
-
$
333,600
3,884,100
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
1. Equity In Subsidiary Income
240,000
Dividends Declared ($75,000 x 80%)
Investment in Stone Company
60,000
180,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income
Slide
7-35
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
Original Cost
Selling Price
Difference
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)
2. Plant and Equipment
Retained Earnings – Prather ($150,000 x 80%)
Noncontrolling Interest ($150,000 x 20%)
Accumulated Depreciation
390,000
120,000
30,000
540,000
To reduce controlling and noncontrolling interests for their shares of
unrealized intercompany profit at beg. of year, to restore fixed assets to
its book value to the selling affiliate on the date of the intercompany sale
Slide
7-36
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
Original Cost
Selling Price
Difference
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)
3. Accumulated Depreciation
Other Expenses (Depreciation Expense)
Retained Earnings – Prather ($15,000 x 80%)
Noncontrolling Interest ($15,000 x 20%)
30,000
15,000
12,000
3,000
To reverse amount of excess depreciation recorded during year and to
recognize an equivalent amount of intercompany profit as realized
Slide
7-37
LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
P7-12: Prepare the worksheet entries for Dec. 31, 2012.
4. Beg. Retained Earnings - Stone
Common Stock - Stone
1,038,000
525,000
Investment in Stone
1,250,400 *
312,600 **
Noncontrolling Interest
To eliminate investment account and create NCI account
* (($1,263,000 - $675,000) x 80%) - $180,000 = $290,400 + $960,000 =
$1,250,400
** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
Slide
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LO 6 Workpaper entries-upstream sales.
Intercompany Sales of Depreciable Property
Year Subsequent to Intercompany Sale
Upstream Sale
P7-16 (Complete Equity Method): Prather Company owns 80% of
the common stock of Stone Company. The stock was purchased
for $960,000 on January 1, 2009, when Stone Company’s retained
earnings were $675,000. On January 1, 2011, Stone Company sold
fixed assets to Prather Company for $960,000; Stone Company
had purchased these assets for $1,350,000 on January 1, 2001, at
which time their estimated useful life was 25 years. The
estimated remaining useful life to Prather Company on 1/1/11 is 10
years. Both companies employ the straight-line method of
depreciation.
Required: A. Prepare a consolidated statements workpaper for
the year ended December 31, 2012.
Slide
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LO 6 Upstream sales- complete equity method.
Intercompany Sales of Depreciable Property
P7-16 (Complete Equity Method):
Income Statement
Sales
Equity in Stone income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income
Panther
$ 1,950,000
252,000
2,202,000
1,350,000
225,000
1,575,000
627,000
$
627,000
Eliminations
Credit
Debit
Stone
$ 1,350,000
NCI
252,000 (1)
1,350,000
900,000
150,000
1,050,000
300,000
$
300,000
15,000 (3)
$
252,000
$
Retained Earnings Statement
Retained earnings, 1/1
1,397,400
Panther
1,038,000 (5)
1,038,000
Stone
252,000
300,000
627,000
Net income
(75,000)
(150,000)
Dividends declared
$ 1,874,400 $ 1,263,000 $ 1,290,000 $
Retained earnings, 12/31
15,000
$
63,000
63,000
Consolidated
Balances
3,300,000
$
3,300,000
2,250,000
360,000
2,610,000
690,000
(63,000)
627,000
$
63,000
15,000
60,000 (1) (15,000)
75,000 $ 48,000 $
1,397,400
627,000
(150,000)
1,874,400
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000
Slide
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LO 6 Upstream sales- complete equity method.
Intercompany Sales of Depreciable Property
P7-16 (Complete Equity Method):
Balance Sheet
Inventory
Investment in S
Fixed assets
Accum. Depreciation
Total assets
Liabilities
Common stock
Retained earnings
NCI in net assets
Panther
498,000
$
1,334,400
$
$
$
Stone
225,000
120,000
2,168,100
(900,000)
3,100,500 $
465,600
760,500
1,874,400
Eliminations
Credit
Debit
$
390,000
30,000
2,625,000
(612,000)
2,238,000
(2)
(2)
(3)
192,000
12,000
1,250,400
540,000
NCI
(1)
(3)
Consolidated
Balances
723,000
$
-
(4)
(2)
$
$
450,000
525,000
1,263,000
525,000
1,290,000
30,000
(4)
(2)
75,000
312,600
3,000
(5)
48,000
285,600
(3)
333,600
Total liab. & equity $
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3,100,500
$
2,238,000
$
2,385,000
$ 2,385,000
5,183,100
(2,022,000)
3,884,100
915,600
760,500
1,874,400
-
$
333,600
3,884,100
LO 6 Upstream sales- complete equity method.
Intercompany Sales of Depreciable Property
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
1. Equity in Subsidiary Income
252,000
Dividends Declared ($75,000 x 80%)
Investment in Stone Company
60,000
192,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income
Slide
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LO 6 Upstream sales- complete equity method.
Intercompany Sales of Depreciable Property
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
Original Cost
Selling Price
Difference
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)
2. Plant and Equipment
Investment in Stone ($150,000 x 80%)
Noncontrolling Interest ($150,000 x 20%)
Accumulated Depreciation
390,000
120,000
30,000
540,000
To reduce controlling and noncontrolling interests for their shares of
unrealized intercompany profit at beg. of year, to restore the carrying value
of equipment to its book value on the date of the intercompany sale
Slide
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LO 6 Upstream sales- complete equity method.
Intercompany Sales of Depreciable Property
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
Original Cost
Selling Price
Difference
Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)
3. Accumulated Depreciation
Other Expenses (Depreciation Expense)
Investment in Stone Company ($15,000 x 80%)
Noncontrolling Interest ($15,000 x 20%)
30,000
15,000
12,000
3,000
To reverse amount of excess depreciation recorded during year and to
recognize an equivalent amount of intercompany profit as realized
Slide
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LO 6 Upstream sales- complete equity method.
Intercompany Sales of Depreciable Property
P7-16: Prepare the worksheet entries for Dec. 31, 2012.
4. Beg. Retained Earnings - Stone
Common Stock - Stone
1,038,000
525,000
Investment in Stone
Noncontrolling Interest
1,250,400 *
312,600 **
To eliminate investment account and create NCI account
* (($1,263,000 - $675,000) x 8)%) - $180,000 = $290,400 + $960,000 =
$1,250,400
** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
Slide
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LO 6 Upstream sales- complete equity method.
Calculation And Allocation Of Consolidated
Net Income; Consolidated Retained Earnings:
Complete Equity Method
Under the Complete Equity Method:
 Consolidated net income equals the parent company’s
recorded income.
 Consolidated retained earnings equals the parent
company’s recorded retained earnings.
Slide
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LO 8 Consolidated net income – complete equity method.
Intercompany Interest, Rents, and Service Fees
Income and expenses relating to interest, fees, and rents
should be reported in consolidation only when they arise from
transactions with parties outside the affiliated group.
Workpaper entry to eliminate intercompany interest:
Interest Income
Interest Expense
XXX
XXX
Workpaper entry to eliminate intercompany payables and receivables:
Slide
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Notes Payable
Notes Receivable
XXX
Interest Payable
Interest Receivable
XXX
XXX
XXX
LO 10 Intercompany interest, rents, service fees.
Intercompany Interest, Rents, and Service Fees
Workpaper entry to eliminate intercompany rent:
Rent Income
Rent Expense
XXX
XXX
Intercompany Service Fees
When one affiliate charges fees to another, the form of the
eliminating entry is determined by how the transaction is
recorded by the affiliates.
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LO 10 Intercompany interest, rents, service fees.
Intercompany Interest, Rents, and Service Fees
Eliminating entries relating to intercompany transactions depend
on how these transactions are recorded on the books of the
affiliates. In all cases the financial reporting objectives are:
 To include in revenue only the amounts that result from
transactions with parties outside the affiliated group.
 To present property in the consolidated balance sheet at its
cost to the affiliated group.
 To present accumulated depreciation in the consolidated
balance sheet based on the cost to the affiliated group.
 To present depreciation expense in the consolidated income
statement based on the cost to the affiliated group.
Slide
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LO 10 Intercompany interest, rents, service fees.
APPENDIX - Deferred Tax Consequences
Related to Intercompany Sales of Equipment
Illustration: P Company owns a 70% interest in S Company and that
on January 1, 2008, S Company sells P Company equipment with a book
value of $500,000 (original cost of $800,000 and accumulated
depreciation of $300,000) for $600,000. On January 1, 2008, the
equipment has a remaining useful life of five years and is depreciated
using the straight-line method. The marginal income tax rates for
both companies are 40% and separate income tax returns are filed.
S Company will record a gain of $100,000 on the sale of the
equipment and each year P Company will record depreciation that is
$20,000 greater than depreciation based on the cost of the
equipment to the selling affiliate. Workpaper eliminating entries in
the December 31, 2008, and December 31, 2009, consolidated
Slide
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APPENDIX - Deferred Tax Consequences
Related to Intercompany Sales of Equipment
Illustration: Workpaper eliminating entries in the December 31,
2008, and December 31, 2009, consolidated statements workpapers
relating to the unrealized profit on the intercompany sale of the
equipment are illustrated below:
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APPENDIX - Deferred Tax Consequences
Related to Intercompany Sales of Equipment
Since the selling affiliate is a partially owned subsidiary (upstream
sale), the calculation of the noncontrolling interest in consolidated
income requires that the after-tax amount of gain recorded by the
subsidiary (.60 x $100,000 = $60,000) be subtracted from the
reported net income of the subsidiary and that the after-tax amount
of the gain realized through depreciation (.6 x $20,000 = $12,000)
be added to the reported net income of the subsidiary before
multiplying by the noncontrolling interest percentage. Assuming that
S Company reported net income of $144,000 in 2008, the
noncontrolling interest in consolidated income is $28,800 [.30 x
($144,000 - $60,000 + $12,000)].
Slide
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APPENDIX - Deferred Tax Consequences
Related to Intercompany Sales of Equipment
If the sale of equipment is downstream, no adjustments to the
reported net income of the subsidiary are necessary in the
calculation of the noncontrolling interest in consolidated income.
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APPENDIX - Impact of Unrealized
Intercompany Profit on the Calculation of
Deferred Tax Consequences Related To
Undistributed Subsidiary Income
Before calculating the deferred tax consequences relating lo
undistributed subsidiary income, the amount of undistributed
income must be adjusted for the after-tax amount of unrealized
intercompany profit recorded by the subsidiary that has been
recognized in the determination of consolidated income.
Slide
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APPENDIX – Calculations (and Allocations) of
Consolidated net Income and Consolidated
Retained Earnings.
When the affiliated companies file separate income tax returns, the
calculations of consolidated net income and consolidated retained
earnings must be modified to incorporate income tax consequences.
 Adjustments must now be made for the after-tax amounts of
unrealized intercompany profit.
 Consolidated net income is reduced by the income tax consequence
of undistributed income for the current year.
 Consolidated retained earnings is reduced by the income tax
consequence of undistributed income from the date of acquisition
to the date of the calculation.
Slide
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Copyright
Copyright © 2011 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.
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