2. 1 ©2009 Accounting Department, University Of Siliwangi Intercompany Profit Transactions – Plant Assets Iman P. Hidayat

3. 2 ©2009 Accounting Department, University Of Siliwangi Intercompany Profits on Nondepreciable Plant Assets Nondepreciable asset Company PCompany S

4. 3 ©2009 Accounting Department, University Of Siliwangi Intercompany Profits on Nondepreciable Plant Assets A transfer at a price other than book value gives rise to unrealized profit or loss to the consolidated entity. Any gain or loss on sales downstream from parent to subsidiary is initially included in parent company income and must be eliminated.

5. 4 ©2009 Accounting Department, University Of Siliwangi Intercompany Profits on Nondepreciable Plant Assets The amount of elimination is 100%, regardless of the minority interest percentage. Subsidiary accounts include any profit or loss from upstream sales. The parent company recognizes only its share of the subsidiary’s income.

6. 5 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Land Stan is a 90%-owned subsidiary of Park Corporation, acquired for $270,000 on January 1, 2005. Cost was equal to book value and fair value. Stan’s net income for 2005:$70,000 Park’s income (excluding Stan’s income):$90,000 Park’s income includes a $10,000 unrealized gain from sale of land to Stan that cost $40,000.

7. 6 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Land Investment in Stan63,000 Income from Stan63,000 To record 90% of Stan’s reported income

8. 7 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Land Cash50,000 Land40,000 Gain10,000 To record sale of land to Stan Income from Stan10,000 Investment in Stan10,000 To eliminate unrealized profit on land sold to Stan 0ffset

9. 8 ©2009 Accounting Department, University Of Siliwangi Working Papers December 31, 2005 Adjustments/ Consol- Park Stan Eliminations idated Sales Income from Stan Gain on sale of land Expenses Minority interest expense ($70,000 × 10%) Net income Retained earnings – Park Retained earnings – Stan Add: Net income Retained earnings 12/31 $380 53 10 (300) $143 $207 143 $350 $220 (150) $ 70 $100 70 $170 b 53 a 10 c 7 d 100 $600 (450) (7) $143 $207 143 $350 Income Statement

10. 9 ©2009 Accounting Department, University Of Siliwangi Working Papers December 31, 2005 Other assets Land Investment in Stan Liabilities Capital stock Retained earnings Minority interest $477 323 $800 $ 50 400 350 $800 $350 50 $400 $ 30 200 170 $400 a 10 b 53 d 270 d 200 c 7 d 30 $827 40 $867 $ 80 400 350 37 $867 Adjustments/ Consol- Park Stan Eliminations idated Balance Sheet

11. 10 ©2009 Accounting Department, University Of Siliwangi Upstream Sale of Land Now, assume that Stan sells land to Park with a cost of $40,000 for $50,000. The net incomes for Stan and Park remain the same, but the unrealized profit on the sale of land is now reflected in the income of Stan, rather than Park.

12. 11 ©2009 Accounting Department, University Of Siliwangi Upstream Sale of Land Income from Stan 9,000 Investment in Stan 9,000 To eliminate 90% of the unrealized profit on land purchased from Stan Investment in Stan63,000 Income from Stan63,000 To record 90% of Stan’s reported net income

13. 12 ©2009 Accounting Department, University Of Siliwangi Working Papers December 31, 2005 Adjustments/ Consol- Park Stan Eliminations idated Sales Income from Stan Gain on sale of land Expenses Minority interest expense ($70,000 × 10%) Net income Retained earnings – Park Retained earnings – Stan Add: Net income Retained earnings 12/31 $390 54 (300) $144 $207 144 $351 $210 10 (150) $ 70 $100 70 $170 b 54 a 10 c 6 d 100 $600 (450) (6) $144 $207 144 $351 Income Statement

14. 13 ©2009 Accounting Department, University Of Siliwangi Working Papers December 31, 2005 Other assets Land Investment in Stan Liabilities Capital stock Retained earnings Minority interest $427 50 324 $801 $ 50 400 351 $801 $400 $ 30 200 170 $400 a 10 b 54 d 270 d 200 c 6 d 30 $827 40 $867 $ 80 400 351 36 $867 Adjustments/ Consol- Park Stan Eliminations idated Balance Sheet

15. 14 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Depreciable Plant Assets Perry, Corporation sells machinery to its 80%-owned subsidiary, Soper Corporation, on December 31, 2003. Book value: $90,000 – $40,000 = $50,000 Perry sold the machine for $80,000. What are the journal entries?

16. 15 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Depreciable Plant Assets Cash80,000 Accumulated Depreciation40,000 Machinery90,000 Gain on Sale of Machinery30,000 To record sale of machine to Soper

17. 16 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Depreciable Plant Assets Income from Soper30,000 Investment in Soper30,000 To offset the unrealized gain Investment in Soper 6,000 Income from Soper 6,000 To partially recognize the gain over five years

18. 17 ©2009 Accounting Department, University Of Siliwangi Downstream Sale of Depreciable Plant Assets Machinery80,000 Cash80,000 To record purchase of machine from Perry

19. 18 ©2009 Accounting Department, University Of Siliwangi Working Papers Adjustment Gain on Sale of Machinery30,000 Machinery30,000 To eliminate gain and adjust machinery

20. 19 ©2009 Accounting Department, University Of Siliwangi Sale in Subsequent Year to Outside Entity Assume that Stan uses the land for three years and sells it for $65,000 in 2009. Stan gain: $65,000 – $50,000 = $15,000 Consolidated entity: $65,000 – $40,000 = $25,000

21. 20 ©2009 Accounting Department, University Of Siliwangi Sale in Subsequent Year to Outside Entity Investment in Stan10,000 Income from Stan10,000 To recognize previously deferred profit on sale to Stan

22. 21 ©2009 Accounting Department, University Of Siliwangi Sale in Subsequent Year to Outside Entity Cash65,000 Land50,000 Gain15,000 To record sale of land

23. 22 ©2009 Accounting Department, University Of Siliwangi Sale in Subsequent Year to Outside Entity Investment in Stan10,000 Gain on Land10,000 To adjust gain on land to the $25,000 gain to the consolidated entry

24. 23 ©2009 Accounting Department, University Of Siliwangi Upstream Sale of Land: Minority Interest Stan’s reported net income: $70,000 70,000 $63,000 to Park $7,000 to MI

25. 24 ©2009 Accounting Department, University Of Siliwangi Upstream Sale of Land: Minority Interest Stan’s reported net income:$70,000 Unrealized gain:–10,000 Realized net income:$60,000 60,000 $54,000 to Park $6,000 to MI

26. 25 ©2009 Accounting Department, University Of Siliwangi Consolidated Example Plank Corporation acquired a 90% interest in Sharp Corporation at its book value of $450,000 on January 3, 2005. On July 1, 2005, Plank sold land to Sharp at a gain of $5,000. During 2007, Sharp sold the land to an outsider at a loss to Sharp of $1,000.

27. 26 ©2009 Accounting Department, University Of Siliwangi Consolidated Example On January 2, 2006, Sharp sold equipment with a five-year remaining life to Plank at a gain of $20,000. Plank still had the equipment on 12/31/2007. On January 5, 2007, Plank sold a building to Sharp at a gain of $32,000. The remaining useful life on this date was 8 years. Sharp still owned the building on 12/31/2007.

28. 27 ©2009 Accounting Department, University Of Siliwangi Consolidated Example Underlying equity in Sharp 12/31/2006 ($600,000 equity of Sharp × 90%)$540,000 Less:Unrealized profit on land (5,000) Unrealized profit on equipment ($16,000 × 90 %) (14,400) Investment in Sharp 12/31/2006$520,600

29. 28 ©2009 Accounting Department, University Of Siliwangi Consolidated Example Investment in Sharp 12/31/2006$520,600 Add:Income from Sharp ($80,000 × 90%) 72,000 Gain on land 5,000 Piecemeal recognition of gain on equipment 3,600 Deduct:Unrealized profit on building (28,000) Dividends received 2007 (27,000) Investment in Sharp 12/31/2007$546,200

30. 29 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries aInvestment in Sharp 5,000 Gain on Land 5,000 To recognize previously deferred gain on land

31. 30 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries bInvestment in Sharp14,400 Minority Interest January 1 1,600 Accumulated Depreciation 8,000 Depreciation Expense 4,000 Equipment20,000 To eliminate unrealized profit on upstream sale of equipment

32. 31 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries cGain on Buildings32,000 Accumulated Depreciation 4,000 Buildings32,000 Depreciation Expense 4,000 To eliminate unrealized gain on the downstream sale of buildings

33. 32 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries dIncome from Sharp 52,600 Dividends 27,000 Investment in Sharp 25,600 To eliminate income and dividend from subsidiary

34. 33 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries eMinority Interest Expense8,400 Dividends – Sharp3,000 Minority Interest5,400 To enter minority interest share of subsidiary income and dividends

35. 34 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries fRetained Earnings – Sharp200,000 Capital Stock – Sharp400,000 Investment in Sharp540,000 Minority Interest – Beginning 60,000 To eliminate reciprocal investment and equity balances

36. 35 ©2009 Accounting Department, University Of Siliwangi Inventory Items Purchased for Use as Operating Assets Paco Electronics sells a computer that it manufactures at a cost of $150,000 to Santana. The selling price is $200,000. Santana is Paco’s 100%-owned subsidiary. The computer has a five-year expected useful live.

37. 36 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries: Year of Sale Sales200,000 Cost of Sales150,000 Equipment 50,000 To eliminate intercompany sales and to reduce cost of sales and equipment for the cost and gross profit, respectively

38. 37 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries: Year of Sale Accumulated Depreciation10,000 Depreciation Expense10,000 To eliminate depreciation on the gross profit from the sale ($50,000 ÷ 5)

39. 38 ©2009 Accounting Department, University Of Siliwangi Working Paper Entries: Second Year Investment in Santana40,000 Accumulated Depreciation20,000 Equipment50,000 Depreciation Expense10,000 To reduce equipment to its cost basis to the consolidated entity, to eliminate the effect of the intercompany sale from depreciation expense and accumulated depreciation, and to establish reciprocity between beginning-of-the-period equity and investment amounts