1. Advanced Accounting, Fourth Edition7
Elimination of Unrealized
Gains or Losses on
Intercompany Sales of
Property and Equipment
Advanced Accounting, Fourth Edition

2. 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.
LO 1 Financial reporting objectives nondepreciable property.

3. 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.
LO 1 Financial reporting objectives nondepreciable property.

4. 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 350,000
Land 200,000
Gain on sale 150,000
Entry on Books of Procter
Land 350,000
Cash 350,000
Additional Entry for Complete Equity Method: Proctor Only
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%).
Note: No further entries are recorded on the books of Procter until the land is sold to outsiders.
LO 1 Financial reporting objectives nondepreciable property.

5. 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 150,000
Land ($350,000 - $200,000) 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.
LO 1 Financial reporting objectives nondepreciable property.

6. Intercompany Sales of Nondepreciable Property
E7-4: B(2). Prepare the workpaper entries for the year ended December 31, 2012.
Upstream Sale
Cost Method and Partial Equity Method
Beg. Retained Earnings – Procter (90%) 135,000
Noncontrolling Interest (10%) 15,000
Land 150,000
Complete Equity Method
Investment in Silex Company (90%) 135,000
Noncontrolling Interest (10%) 15,000
Land 150,000
LO 1 Financial reporting objectives nondepreciable property.

7. 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.
LO 1 Financial reporting objectives nondepreciable property.

8. 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 $ 700,000
Cost of land to P Company 600,000
Gain recognized by P Company $ 100,000
B. Calculate the gain that should be recognized in the consolidated statements in 2012.
Selling price to third party $ 700,000
Cost of land to affiliate group 400,000
Gain recognized in consolidation $ 300,000
LO 1 Financial reporting objectives nondepreciable property.

9. 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%) 180,000
Noncontrolling Interest (10%) 20,000
Gain on Sale of Land 200,000 *
Complete Equity Method
Investment in Silex Company (90%) 180,000
Noncontrolling Interest (10%) 20,000
Gain on Sale of Land ,000 *
* Gain recognized in consolidation less gain recognized by P Company ($300,000 - $100,000 = $200,000).
LO 1 Financial reporting objectives nondepreciable property.

10. 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.
LO 4 Intercompany gain realized through usage.

11. 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, 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).
LO 6 Subsidiary vs. parent as the seller.

12. Intercompany Sales of Depreciable Property
P7-1: Entries on the books of Powell and Sullivan to record the intercompany sale are:
Powell Company
Equipment 500,000 Cash 500,000
Sullivan Company
Cash 500,000 Accumulated Depreciation 400,000 Equipment 780,000 Gain on Sale of Equipment 120,000
LO 6 Subsidiary vs. parent as the seller.

13. 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
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.
LO 6 Subsidiary vs. parent as the seller.

14. 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
Accumulated Depreciation - Equipment 15,000
Depreciation Expense ($30,000/2) 15,000
To adjust depreciation expense to the correct amount to the consolidated entity, thus realizing a portion of the gain through usage.
LO 6 Subsidiary vs. parent as the seller.

15. 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
Equipment (to original cost) 280,000
Beg. Retained Earnings - Powell ($120,000 x 80%) 96,000
Noncontrolling Interest ($120,000 x 20%) 24,000
Accumulated Depreciation - Equipment 400,000
To eliminate prior period intercompany gain and restore equipment to its original cost to the consolidated entity.
LO 7 Computing the noncontrolling interest.

16. 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
Accumulated Depreciation - Equipment 45,000
Depreciation Expense ($120,000/4) 30,000
Beg. Retained Earnings – Powell ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
To adjust depreciation for the current and prior year on equipment sold to affiliate.
LO 7 Computing the noncontrolling interest.

17. 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) 280,000
Investment in Sullivan ($120,000 x 80%) 96,000
Noncontrolling Interest ($120,000 x 20%) 24,000
Accumulated Depreciation - Equipment 400,000
Accumulated Depreciation - Equipment 45,000
Depreciation Expense ($120,000/4) 30,000
Investment in Sullivan ($15,000 x 80%) 12,000
Noncontrolling Interest ($15,000 x 20%) 3,000
LO 7 Computing the noncontrolling interest.

18. 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.
LO 7 Computing the noncontrolling interest.

19. 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.
LO 6 Workpaper entries-upstream sales.

20. 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 XXX
Interest Expense XXX
Workpaper entry to eliminate intercompany payables and receivables:
Notes Payable XXX
Notes Receivable XXX
Interest Payable XXX
Interest Receivable XXX
LO 10 Intercompany interest, rents, service fees.

21. Intercompany Interest, Rents, and Service Fees
Workpaper entry to eliminate intercompany rent:
Rent Income XXX
Rent Expense 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.
LO 10 Intercompany interest, rents, service fees.