Accounting for intercompany transaction of non-current assets, particularly depreciable assets.

1. Intercompany
Transaction:
Non-current Assets
(Part 2)
ARTHIK DAVIANTI

2. Prepare equity-method journal
entries and elimination entries for
the consolidation of a subsidiary
following a downstream and
upstream depreciable asset
transfer.

3. Transfers of Depreciable Assets
What is the major difference between depreciable and non-
depreciable assets?
• Depreciation—DUH!
• Adds complexity because you have a “moving target” instead
of a stationary target. However, the concepts are the same!
Adjust for:
• Unrealized gain (same as with land)
• Differences in depreciation expense
The goal is to get back to the asset’s old basis “as if ” it were still
on the books of the original owner.
• One difference—depreciated going forward based on the new
estimated new life.
• Same as a change of depreciation estimates on any company’s
books

4. Developing Fixed Asset Elimination Entries
Compare “Actual” with “As if ”
• “Actual” = How the transferred asset and related
accounts actually appear on the companies’ books
• “ As if ” = How the transferred asset and related
accounts would have appeared if the asset had stayed on
the original owner’s books
The difference between the two gives the elimination entry
or entries.

5. Choosing the Right Depreciable Life
What’s not relevant?
The original owner’s remaining useful life at the transfer
date.
What’s relevant?
The acquirer’s estimated remaining useful life (if different
from the original remaining life).

6. Downstream sale
of depreciable assets

7. Illustration (p. 323)
Peerless Products Corporation sells equipment to Special
Foods on December 31, 20X1, for $7,000 as follows:
Peerless
Product
Special
Foods
$9,000 $7,000
Dec 31, 20W8 Dec 31, 20X1
Purchase
equipment
Inter-
corporate
transfer of
equipment
Consolidated Entity

8. Illustration (p. 323)
Assume the equipment has been depreciated – useful
life of 10 years using straight line method with no
residual value.
Original cost to Peerless 9,000
Accumulated depreciation on December 31, 20X1
Annual depreciation ($9,000 : 10 years) 900
Number of years x 3
(2,700)
Book value on December 31, 20X1 6,300
9,000
Buildings &
Equipment
Accumulated
Depreciation
7,000
Book Value = 6,300
Sale:
Sale price $7,000
 Book Value 6,300
Gain $ 700

9. Separate Company Entries – 20X1
Special Foods records:
December 31, 20X1
(11) Equipment 7,000
Cash 7,000
Record purchase of equipment
Special Foods – no depreciation (purchase at end of
year)
Peerless records depreciation – prior to calculating the
gain on sale:
December 31, 20X1
(12) Depreciation expense 900
Accumulated depreciation 900
Record depreciation on equipment sold

10. Peerless also records the sale and recognise the $700
($7,000 - $6,300) gain on the sale:
December 31, 20X1
(13) Cash 7,000
Accumulated depreciation 2,700
Equipment 9,000
Gain on sale of equipment 700
Record sale of equipment
Separate Company Entries – 20X1

11. Peerless also records the normal fully adjusted equity
method entries to recognise its share of Special Foods’
income and dividend for 20X1:
(14) Investment in Special Foods 40,000
Income from Special Foods 40,000
Record Peerless’ 80% share of Special Foods’ 20X1 income
$50,000 X 0.80
(15) Cash 24,000
Investment in Special Foods 24,000
Record Peerless’ 80% share of Special Foods’ 20X1 dividend
$30,000 X 0.80
Separate Company Entries – 20X1

12. Under the fully adjusted equity method, Peerless Inc. defers
relative the gain on the intercompany sale of equipment as
follows:
(16) Income from special Foods 700
Investment in Special Foods 700
Defer unrealised gain on asset sale to Special Foods
Investment in
Special Foods
700
Income from
Special Foods
700Defer Gain
80% NI 40,000 40,000 80% NI
39,300 Ending balance
Acquisition 240,000
24,000 80% Dividend
Acquisition 255,300
Separate Company Entries – 20X1

13. Book Value Calculations
Investment
Account Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 60,000 240,000 200,000 100,000
+ Net income 10,000 40,000 50,000
- Dividend (6,000) (24,000) (30,000)
Ending book value 64,000 256,000 200,000 120,000
=
Analyze book value of Special Foods and allocate each component
to Peerless and the NCI shareholders:
Consolidation Worksheet – 20X1

14. Basic investment account elimination entry:
Common Stock 200,000
Retained Earnings 100,000
Income from Special Foods 39,300
NCI in NI of Special Foods 10,000
Dividends Declared 30,000
Investment in Special Foods 255,300
NCI in NA of Special Foods 64,000
Consolidation Worksheet – 20X1

15. What accounts and balances actually exist after the fixed
asset transfer?
SP 7,000 0
Buildings &
Equipment
Accumulated
Depreciation Gain on Sale
700“Actual”
Review:
Assume Peerless purchased an equipment on 31/12/20W8 for
$9,000 and estimated that the machine would have a useful life
of 10 years with no salvage value. On 12/31/20X1, Peerless sold
the equipment to its 80% owned subsidiary, Special Foods., for
$7,000.

16. Peerless’ income is overstated by the $700 gain.
Special Foods’ Building and equipment is also overstated
by the same amount.
Compare what actually happened (as recorded in the
individual financial statement of the two companies)
with what is ‘as if’ it had not been transferred (historical
cost $9,000 with accumulated depreciation $2,700)
SP 7,000 0
Buildings &
Equipment
Accumulated
Depreciation Gain on Sale
700“Actual”
“As if”P 9,000 2,700 0
Consolidation Worksheet – 20X1

17. The worksheet entry on 12/31/X1 to eliminate the asset
transfer is simply the “adjustment” to change from
“actual” to “as if” the asset hadn’t been transferred.
SP 7,000 0
Accumulated
Depreciation Gain on Sale
700“Actual”
“As if”P 9,000 2,700 0
2,000 2,700 700
Consolidation Worksheet – 20X1
Eliminate gain on sale of equipment to Special Food
Gain on Sale 700
Buildings and equipment 2,000
Accumulated depreciation 2,700
Buildings &
Equipment

18. Consolidation Worksheet—20X1
Adjustments
Parent Sub DR CR Consolidated
Income Statement
Gain on Sale 700 700 0
Income from Sub 39,300 39,300
Basic
0
Balance Sheet
Investment in Sub 255,300 255,300
Basic
0
Buildings & equipment 791,000 607,000 2,000 1,400,000
Less: Acc. depreciation (447,300) (320,000) 2,700 770,000
(worksheet, Baker p. 326).

19. During 20X2, Special Foods – depreciate the $7,000 cost
of the equipment from Peerless Products over 7 years of
its remaining life using straight line.
The depreciation – $7,000 : 7 years = $1,000
(17) Depreciation expense 1,000
Accumulated depreciation 1,000
Record depreciation expense for 20X2
Separate Company Entries – 20X2

20. Peerless also records the normal fully adjusted equity
method entries to recognise its share of Special Foods’
$74,000 income and $40,000 dividend for 20X2.
Note: Special Foods’ net income is $74,000, it has been
reduced by $1,000 of depreciation on the transferred
asset.
(18) Investment in Special Foods 59,200
Income from Special Foods 59,200
Record Peerless’ 80% share of Special Foods’ 20X2 income
$74,000 X 0.80
(19) Cash 32,000
Investment in Special Foods 32,000
Record Peerless’ 80% share of Special Foods’ 20X2 dividend
$40,000 X 0.80
Separate Company Entries – 20X2

21. Separate Company Entries – 20X2
Gain = 700  7 = 100 Extra Depreciation
Book Value = 6,300  7 = 900 Parent Depreciation
1,000 Total Depreciation
Peerless must record an additional entry related to the
transferred of asset – on Dec 31, 20X1 the equipment
was recorded on Special Foods’ balance sheet at
$7,000). Special Foods will record “extra” depreciation
expense.
Special Foods’ annual depreciation ($7,000 : 7 years =
$1,000 per year) is $100 per year higher. If Peerless
had kept the equipment, the depreciation would be
$900 ($6,300 : 7).

22. Special Foods will record “extra” depreciation expense.
Special Foods’ annual depreciation ($7,000 : 7 years =
$1,000 per year) is $100 per year higher.
If Peerless had kept the equipment, the depreciation
would be $900 ($6,300 : 7).
Thus, in 20X2 (and over the next six years) Peerless
reverse 1/7 of the gain deferral, as follows:
(20) Investment in Special Foods 100
Income from Special Foods 100
Reverse 1/7 of the deferred gain on fixed asset sold to Special Foods
Separate Company Entries – 20X2

23. Book Value Calculations
Investment
Account Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 64,000 256,000 200,000 100,000
+ Net income 10,000 59,200 74,000
- Dividend (8,000) (32,000) (40,000)
Ending book value 64,000 256,000 200,000 154,000
=
Consolidation worksheet (p. 329)
Consolidation Worksheet – 20X2

24. Basic investment account elimination entry:
Common Stock 200,000
Retained Earnings 100,000
Income from Special Foods 59,300
NCI in NI of Special Foods 14,800
Dividends Declared 40,000
Investment in Special Foods 283,300
NCI in NA of Special Foods 64,000
Consolidation Worksheet – 20X1

25. The 20X2 worksheet’s entries: revalues the assets and
corrects depreciation expense.
1,000
Accumulated
Depreciation Gain on Sale
700“Actual”
“As if” 3,600 0
2,000 2,700 700
Consolidation Worksheet – 20X1
Entries to adjust equipment and accumulated depreciation “as
if” still on parent’s books:
Investment in Special Foods 700
Buildings and equipment 2,000
Accumulated depreciation 2,700
Buildings &
Equipment
SP 7,000
P 9,000
100
Accumulated depreciation 100
Depreciation expense 100

26. Consolidation Worksheet—20X2
Adjustments
Parent Sub DR CR Consolidated
Income Statement
Less: Depreciation Expense (49,100) (160,000) 100 (70,000)
Income from Sub 39,300 59,300
Basic
0
Balance Sheet
Investment in Sub 282,600 700 283,300
Basic
0
Buildings & equipment 791,000 607,000 2,000 1,400,000
Less: Acc. depreciation (496,400) (341,000) 100 2,700 840,000
(worksheet, Baker p. 329).

27. The 20X1 consolidated net income is computed and
allocated as follows:
Subsidiary Trial
Balance
Elimination Consolidated
Amounts
Buildings and equipment $7,000 $2,000 $9,000
Accumulated depreciation (1,000) (2,600) (3,600)
Depreciation expense 1,000 (100) 900
Consolidation Worksheet—20X2

28. Consolidated Net Income
and Retained Earnings
The 20X2 consolidated net income must include an
adjustment for realization of profit on the 20X1 sale of
equipment to Special Foods.
Peerless’ separate income $160,900
Partial realization of intercompany gain on downstream sale of
equipment 100
Peerless’ separate realized income $161,000
Special Foods’ net income 74,000
Consolidate net income, 20X2 $235,000
Income to noncontrolling interest ($74,000 X 0.20) (14,800)
Income to controlling interest $220,200

29. Noncontrolling Interest
Income allocated to the NCI in 20X2 – proportionate
with share. NCI’s share is $14,800 ($74,000 x 0.20).
Noncontrolling interest on December 31, 20X2, is equal
to a proportionate share of Special Foods’ book value:
Book value of Special Foods, December 31, 20X2:
Common stock $200,000
Retained earnings 154,000
Total book value $354,000
Noncontrolling stockholders’ proportionate share X 0.20
Noncontrolling interest, December 31, 20X2 $70,800

30. Consolidation in Subsequent Years
Consolidation procedure – similar to those in 20X2.
The procedure include two objectives:
1. Restating the asset and accumulated depreciation
balances.
2. Adjusting depreciation expense for the year.
Summary is in page 332

31. Upstream sale
of depreciable assets

32. Upstream Sale
Special Foods sales equipment to Peerless Products
for $7,000 on December 31, 20X1, and reports total
income for 20X1 of $50,700 ($50,000 + $700),
including $700 gain on the sale of equipment.
Special Foods originally purchased the equipment for
$9,000 three years before the intercompany sale.
The book value of the equipment:
P
S
NCI
20%
80%
Original cost to Special Foods 9,000
Accumulated depreciation on December 31, 20X1
Annual depreciation ($9,000 : 10 years) 900
Number of years x 3
(2,700)
Book value on December 31, 20X1 6,300

33. Separate Company Entries – 20X1
Special Foods records depreciation for the year and the
sale of the equipment to Peerless on Dec 31, 20X1:
December 31, 20X1
(21) Depreciation expense 900
Accumulated depreciation 900
Record 20X1 depreciation expense on equipment sold
December 31, 20X1
(22) Cash 7,000
Accumulated depreciation 2,700
Equipment 9,000
Gain on sale of equipment 700
Record sale of equipment

34. Peerless also records the purchase of the equipment
from Special Foods:
December 31, 20X1
(23) Equipment 7,000
Cash 7,000
Record purchase of equipment
Separate Company Entries – 20X1

35. Peerless also records the normal fully adjusted equity
method entries to recognise its share of Special Foods’
income and dividend for 20X1:
(24) Investment in Special Foods 40,560
Income from Special Foods 40,560
Record Peerless’ 80% share of Special Foods’ 20X1 income
$50,700 X 0.80
(25) Cash 24,000
Investment in Special Foods 24,000
Record Peerless’ 80% share of Special Foods’ 20X1 dividend
$30,000 X 0.80
Separate Company Entries – 20X1

36. Under the fully adjusted equity method, Peerless Inc. defers
relative the gain on the intercompany sale of equipment as
follows:
(26) Income from special Foods 560
Investment in Special Foods 560
Defer 80% of the unrealised gain on asset purchase from Special
Foods: $700 X 0.80
Investment in
Special Foods
560
Income from
Special Foods
560Defer Gain
80% NI 40,560 40,560 80% NI
40,000 Ending balance
Acquisition 240,000
24,000 80% Dividend
Acquisition 256,000
Separate Company Entries – 20X1

37. Book Value Calculations
Investment
Account Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 60,000 240,000 200,000 100,000
+ Net income 10,140 40,560 50,700
- Dividend (6,000) (24,000) (30,000)
Ending book value 64,140 256,560 200,000 120,700
=
Analyze book value of Special Foods and allocate each component
to Peerless and the NCI shareholders:
Consolidation Worksheet – 20X1

38. Basic investment account elimination entry:
Common Stock 200,000
Retained Earnings 100,000
Income from Special Foods 40,000
NCI in NI of Special Foods 10,000
Dividends Declared 30,000
Investment in Special Foods 256,000
NCI in NA of Special Foods 64,000
Consolidation Worksheet – 20X1

39. The equipment now on Peerless’ books ($7,000, no
depreciation – adjust to “as if” it had been transferred.
Historical cost of $9,000 with accumulated depreciation
of $2,700.
Consolidation Worksheet – 20X1
P 7,000 0
Accumulated
Depreciation Gain on Sale
700“Actual”
“As if”SP 9,000 2,700 0
2,000 2,700 700
Eliminate gain on sale of equipment to Special Food
Gain on Sale 700
Buildings and equipment 2,000
Accumulated depreciation 2,700
Buildings &
Equipment

40. Consolidation Worksheet—20X1
Adjustments
Parent Sub DR CR Consolidated
Income Statement
Gain on Sale 700 700 0
Income from Sub 40,000 40,000
Basic
0
Balance Sheet
Investment in Sub 256,000 256,000
Basic
0
Buildings & equipment 807,000 591,000 2,000 1,400,000
Less: Acc. depreciation (450,000) (317,300) 2,700 770,000
(worksheet, Baker p. 335).

41. Noncontrolling Interest
The income assigned to the noncontrolling
shareholders based on their share of Special Foods’
realized income, as follows:
Net income of Special Foods for 20X1 $50,700
Unrealized intercompany sale (700)
Realized net income of Special Foods for 20X1 50,000
Noncontrolling shareholders’ proportionate share X 0.20
Income to noncontrolling interest, 20X1 $10,000

42. Consolidated Net Income
The 20X1 consolidated net income is computed and
allocated as follows:
Peerless’ separate income $140,000
Special Foods’ net income $50,700
Less: Unrealized intercompany gain on upstream
land sale (700)
Special Foods’ net income 50,000
Consolidate net income, 20X1 $190,000
Income to noncontrolling interest ($50,000 X 0.20) (10,000)
Income to controlling interest $180,000

43. Separate Company Entries – 20X2
Gain = 700  7 = 100 Extra Depreciation
Book Value = 6,300  7 = 900 Parent Depreciation
1,000 Total Depreciation
Special Foods reports net income of $75,900 ($900 of
depreciation expense on the transferred asset – in
Peerless’ income statement.
The extra $100 of depreciation now in Peerless’
income statement:

44. Peerless recognizes 80% of the deferred gain:
(($700 : 7 years) X 0.80 = $80
Peerless’ extra depreciation – cancels out 1/7 of the
unrealized gain.
(27) Investment in Special Foods 80
Income from Special Foods 80
Recognized 80% of 1/7 of the deferred gain on fixed asset purchased
from Special Foods.
Separate Company Entries – 20X2

45. Book Value Calculations
Investment
Account Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 64,140 256,560 200,000 100,000
+ Net income 15,180 60,720 75,900
- Dividend (8,000) (32,000) (40,000)
Ending book value 71,320 285,280 200,000 156,600
=
Consolidation worksheet (p. 338)
Consolidation Worksheet – 20X2

46. Basic investment account elimination entry:
Common Stock 200,000
Retained Earnings 120,700
Income from Special Foods 60,800
NCI in NI of Special Foods 15,200
Dividends Declared 40,000
Investment in Special Foods 285,360
NCI in NA of Special Foods 71,340
Consolidation Worksheet – 20X2

47. The 20X2 worksheet’s entries: revalues the assets and
corrects depreciation expense.
1,000
Accumulated
Depreciation Gain on Sale
700“Actual”
“As if” 3,600
0
2,000 2,700
560
140
Consolidation Worksheet – 20X2
Entries to adjust equipment and accumulated depreciation “as
if” still on parent’s books:
Investment in Special Foods 560
NCI in NA of Special Foods 140
Buildings and equipment 2,000
Accumulated depreciation 2,700
Buildings &
Equipment
P 7,000
SP 9,000
100
Accumulated depreciation 100
Depreciation expense 100

48. Consolidation Worksheet—20X2
Adjustments
Parent Sub DR CR Consolidated
Income Statement
Less: Depreciation Expense (49,100) (160,000) 100 (70,000)
Income from Sub 60,800 60,800
Basic
0
Balance Sheet
Investment in Sub 284,800 560 285,360
Basic
0
Buildings & equipment 807,000 591,000 2,000 1,400,000
Less: Acc. depreciation (501,000) (336,400) 100 2,700 840,000
(worksheet, Baker p. 338).

49. Consolidated Net Income
The 20X2 consolidated net income is computed and
allocated as follows:
Peerless’ separate income $159,000
Special Foods’ net income $75,900
Less: Unrealized intercompany gain on upstream
sale of equipment 100
Special Foods’ realized net income 76,000
Consolidate net income, 20X1 $235,000
Income to noncontrolling interest ($76,000 X 0.20) (15,200)
Income to controlling interest $219,800

50. Noncontrolling Interest
Income allocated to the NCI in 20X2 – proportionate
with share. NCI’s share is $15,200 ($76,000 x 0.20).
Noncontrolling interest on December 31, 20X2, is equal
to a proportionate share of Special Foods’ book value:
Book value of Special Foods, December 31, 20X2:
Common stock $200,000
Retained earnings 156,600
Total book value $356,600
Unrealized 20X1 intercompany gain on upstream sale (700)
Intercompany gain realized in 20X2 100
Realized book value of Special Foods $356,000
Noncontrolling stockholders’ proportionate share X 0.20
Noncontrolling interest, December 31, 20X2 $71,2000

51. Consolidation in Subsequent Years
Consolidation procedure – similar to those in 20X2
(until 20X8 – equipment’s end of useful life).
Summary in page 340
Investment in Special Foods 560
NCI in NA of Special Foods 140
Buildings & Equipment 2,000
Accumulated Depreciation 2,700
Accumulated Depreciation 100
Depreciation Expense 100
20X2 Worksheet Entries:
20X3 Worksheet Entries:
SP: 9,000
Equipment
P: 7,000
2,000
Accumulated
Depreciation
1,000
2,700
96,000“As if”
“Actual
” 100
Equipment
P: 90,000
30,000
Accumulated
Depreciation
1,000
2,600
4,500“As if”
“Actual
” 100
Investment in Special Foods 480
NCI in NA of Special Foods 120
Buildings & Equipment 2,000
Accumulated Depreciation 2,600
Accumulated Depreciation 100
Depreciation Expense 100 SP: 9,000

52. Source:
BAKER CHRISTENSEN COTTLRELL
Advanced Financial Accounting
Ninth Edition
McGRAW HILL INTERNATIONAL EDITION