0. 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

1. Intercompany Sales of Land (Nondepreciable Property)
Parent Company
Land
Downstream Sale
Upstream Sale
Subsidiary

2. 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

3. Upstream Sales - Land An Example
Parent
Company
Sells land for $500,000
Sells to outside party for $550,000 years later
Purchased land for $300,000
80% owned
Subsidiary
S records gain on sale of land of $200,000

4. Upstream Sales - Land Cost and Partial Equity Methods
Year of Intercompany Sale - EE
Gain on sale of land 200,000
Land ,000
To reduce the land to its historical
cost paid by the selling affiliate
To exclude the unrealized
gain from consolidated
net income

5. 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%) ,000
Beginning R/E - S ($200,000 x 20%) ,000
Land ,000
To reduce the land to its historical
cost paid by the selling affiliate
Noncontrolling interests’ share
of the unrealized gain

6. 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%) ,000
Beginning R/E - S ($200,000 x 20%) ,000
Gain on sale of land ,000
To record intercompany gain
on sale of land, which is realized
in the current year
Noncontrolling interests’ share
of the unrealized gain

7. Upstream Sales - Land Complete Equity Method
Year of Intercompany Sales - Journal Entry
Equity in subsidiary income ,000
Investment in S ,000
To exclude the parent’s
share of the unrealized
gain from equity in
subsidiary income

8. Upstream Sales - Land Complete Equity Method
Year of Intercompany Sale - EE
Gain on sale of land 200,000
Land ,000
To reduce the land to its historical
cost paid by the selling affiliate
To exclude the unrealized
gain from consolidated
net income

9. Upstream Sales - Land Complete Equity Method
Years after Intercompany Sale - EE
Parent’s share of the
unrealized gain
Investment in S ,000
Beginning retained earnings - S ,000
Land ,000
To reduce the land to its historical
cost paid by the selling affiliate
Noncontrolling interests’ share
of the unrealized gain

10. Upstream Sales - Land Complete Equity Method
Year of Sale to Outside Party - EE
Parent’s share of the
unrealized gain
Investment in S ,000
Beginning retained earnings - S ,000
Gain on sale of land ,000
To record intercompany gain
on sale of land, which is realized
in the current year
Noncontrolling interests’ share
of the unrealized gain

11. Intercompany Sales Depreciable Property
Parent Company
Machinery, Equipment
or Building
Downstream Sale
Upstream Sale
Subsidiary

12. 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

13. Downstream Sales - Equipment An Example
Sold on 1/1/2002
for $900,000
90% owned
Subsidiary
Parent
Company
Purchased
equipment for
$1,350,000
Parent has recorded $600,000 Acc. Dep. On the equipment
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

14. Downstream Sales - Equipment All Methods
Year of Intercompany Sale
To restore the equipment
to its historical cost
The Equipment EE
Equipment (1,350, ,000) 450,000
Gain on sale of equipment 150,000
Accumulated depreciation ,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
To eliminate the unrealized
gain

15. Downstream Sales - Equipment All Methods
Year of Intercompany Sale
The Depreciation EE
Accumulated Depreciation 50,000
Depreciation Expense 50,000
To adjust depreciation expense from the recorded amount to
the amount based on the original historical cost of equipment

16. Downstream Sales - Equipment Cost or Partial Equity Methods
Years after Intercompany Sale
To restore the equipment
to its historical cost
The Equipment EE
Equipment (1,350, ,000) 450,000
Beginning retained earnings - P 150,000
Accumulated depreciation ,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
To eliminate the unrealized
gain

17. Downstream Sales - Equipment Cost or Partial Equity Methods
Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation 100,000
Beginning retained earnings - P ,000
Depreciation Expense 50,000
Adjustment to prior
years’ depreciation expense
Adjustment to current
year’s depreciation expense

18. Downstream Sales - Equipment Complete Equity Methods
Years after Intercompany Sale
To restore the equipment
to its historical cost
The Equipment EE
Equipment (1,350, ,000) 450,000
Investment in S 150,000
Accumulated depreciation ,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
To eliminate the unrealized
gain from the investment
account

19. Downstream Sales - Equipment Complete Equity Methods
Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation 100,000
Investment in S ,000
Depreciation Expense 50,000
Adjustment to prior
years’ depreciation expense
Adjustment to current
year’s depreciation expense

20. Upstream Sales - Equipment An Example
Sold on 1/1/2002
for $600,000
Parent
Company
90% owned
Subsidiary
Purchased
equipment for
$800,000
Subsidiary has recorded $300,000 Acc. Dep. on the equipment
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

21. Upstream Sales - Equipment Cost and Partial Equity Methods
Year of Intercompany Sale
To restore the equipment
to its historical cost
The Equipment EE
Equipment (1,350, ,000) 450,000
Gain on sale of equipment 150,000
Accumulated depreciation ,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
To eliminate the unrealized
gain

22. Upstream Sales - Equipment Cost and Partial Equity Methods
Year of Intercompany Sale
The Depreciation EE
Accumulated Depreciation 50,000
Depreciation Expense 50,000
To adjust depreciation expense from the recorded amount to
the amount based on the original historical cost of equipment

23. Upstream Sales - Equipment Cost and Partial Equity Methods
Years after Intercompany Sale
To eliminate the parent’s and
noncontrolling interests’ shares of
unrealized gain recorded in prior years
The Equipment EE
Beginning retained earnings - P ,000
Beginning retained earnings - S 15,000
Equipment (800, ,000) 200,000
Accumulated depreciation ,000
To restore the equipment
to its historical cost
To restore the accumulated depreciation
to its balance on the date of
intercompany sale

24. Upstream Sales - Equipment Cost and Partial Equity Methods
Years after Intercompany Sale
The Depreciation EE
Accumulated Depreciation 40,000
Depreciation Expense ,000
Beginning retained earnings - P ,000
Beginning retained earnings - P ,000
Adjustment to prior
years’ depreciation expense
Adjustment to current
year’s depreciation expense

25. Upstream Sales - Equipment Cost and Partial Equity Methods
Disposal of Equipment by Purchasing Affiliate
The Disposal EE
Beginning retained earnings - P ,000
Beginning retained earnings - S ,000
Gain on sale of equipment ,000 i
To include the intercompany profit, which is realized
in the current year, in consolidated NI

26. 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

27. Upstream Sales - Equipment Cost and Partial Equity Methods
Controlling Interest in Income
Downstream-sale profit in ending inventory
Reported income of P
Downstream-sale realized profit in beginning inventory
Unrealized gain on
downstream-sale of
equipment
Depreciation adjustment (gain realized through usage)
Amortization of purchase
differential
(Adjusted NI of S) x (P %)
Consolidated income

28. Upstream Sales - Equipment Cost and Partial Equity Methods
Consolidated Retained Earnings
P% x (Upstream-sale profit in P’s ending inventory)
Reported R/E of P
Downstream-sale profit in S’s ending inventory
P’s share of increase in
S R/E since acquisition
P% x (Unrealized gain on
upstream-sale of equipment)
Unrealized gain on downstream
sale of equipment
Accumulative amortization of purchase differential
Consolidated R/E

29. Downstream Sales - Equipment Complete Equity Method
Year of Intercompany Sale - JE
The Gain JE:
Equity in subsidiary income 85,000
Investment in S ,000
to adjust subsidiary income downward
for the unrealized gain on sale of equipment
The Depreciation JE:
Investment in S 17,000
Equity in subsidiary income 17,000
to adjust subsidiary income upward for
the gain realized through usage

30. Downstream Sales - Equipment Complete Equity Method
Year of Intercompany Sale - EE
To restore the equipment
to its historical cost
The Equipment EE
Equipment ,000
Gain on sale of equipment 200,000
Accumulated depreciation ,000
To restore the accumulated
depreciation to its balance
on the date of
intercompany sale
To eliminate the unrealized
gain

31. Downstream Sales - Equipment Complete Equity Method
Year of Intercompany Sale - EE
The Depreciation EE
Accumulated Depreciation 250,000
Depreciation Expense 20,000
To adjust depreciation expense from the recorded amount to
the amount based on the original historical cost of equipment

32. 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 ,000
Beginning retained earnings - S 15,000
Equipment ,000
Accumulated depreciation ,000
To restore the accumulated
depreciation to its balance on the
date of intercompany sale
To restore the equipment
to its historical cost

33. Downstream Sales - EE Complete Equity Method
Years after Intercompany Sale - EE
The Depreciation EE
Accumulated Depreciation ,000
Investment in S ,000
Beginning retained earnings - S 3,000
Depreciation Expense 20,000
Adjustment to prior
years’ depreciation expense
Adjustment to current
year’s depreciation expense

34. 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

35. Downstream Sales - EE Complete Equity Method
Disposal of Equipment by Purchasing Affiliate
The Disposal EE
Investment in S ,000
Beginning retained earnings - S ,000
Gain on sale of equipment ,000 i
To include the intercompany
profit, which is realized
in the current year,
in consolidated NI

36. Advanced Accounting by Debra Jeter and Paul Chaney
Copyright © 2001 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.