Bclaa8e ab.az.chapter 06

6 - 13 Prentice Hall Business Publishing, Advanced Accounting 8/e, Beams/Anthony/Clement/Lowensohn
Intercompany Profit
Transactions – Plant Assets
Chapter 6

Learning Objective 1
Assess the impact of intercompany
profit on transfers of plant assets
in preparing consolidation
working papers.

Intercompany Profits on
Nondepreciable Plant Assets
Nondepreciable asset
Company P Company S

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.

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.

Defer unrealized profits on
asset transfers by either
the parent or subsidiary.

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.

Investment in Stan 63,000
Income from Stan 63,000
To record 90% of Stan’s reported income

Cash 50,000
Land 40,000
Gain 10,000
To record sale of land to Stan
To eliminate unrealized profit on land sold to Stan
0ffset

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

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
Park Stan Eliminations idatedBalance Sheet

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.

Upstream Sale of Land
To eliminate 90% of the unrealized profit
on land purchased from Stan
To record 90% of Stan’s reported net income

2005
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

2005
Other assets
Land
Investment in Stan
Liabilities
Capital stock
Retained earnings
Minority interest
$427
50
324
$801
$ 50
400
351
$801
$400
$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
Park Stan Eliminations idatedBalance Sheet

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?

Downstream Sale of
Cash 80,000
Accumulated Depreciation 40,000
Machinery 90,000
Gain on Sale of Machinery 30,000
To record sale of machine to Soper

Downstream Sale of
Income from Soper 30,000
Investment in Soper 30,000
To offset the unrealized gain
Investment in Soper 6,000
Income from Soper 6,000
To partially recognize the gain over five years

Downstream Sale of
Machinery 80,000
Cash 80,000
To record purchase of machine from Perry

Working Papers Adjustment
Gain on Sale of Machinery 30,000
Machinery 30,000
To eliminate gain and adjust machinery

Recognize realized, previously
deferred profits on asset transfers
by either the parent or subsidiary.

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

Outside Entity
To recognize previously deferred profit
on sale to Stan

Outside Entity
Cash 65,000
Land 50,000
Gain 15,000
To record sale of land

Outside Entity
Gain on Land 10,000
To adjust gain on land to the $25,000 gain
to the consolidated entry

Adjust the calculations of minority
interest amounts in the presence
of intercompany profits
on asset transfers.

Upstream Sale of Land:
Minority Interest
Stan’s reported net income: $70,000
70,000
$63,000 to Park $7,000 to MI

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

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.

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.

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)
nvestment 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)

Working Paper Entries
a Investment in Sharp 5,000
Gain on Land 5,000
To recognize previously deferred gain on land

b Investment in Sharp 14,400
Minority Interest January 1 1,600
Depreciation Expense 4,000
Equipment 20,000
To eliminate unrealized profit on upstream
sale of equipment

c Gain on Buildings 32,000
Buildings 32,000
To eliminate unrealized gain on the downstream
sale of buildings

d Income from Sharp 52,600
Dividends 27,000
Investment in Sharp 25,600
To eliminate income and dividend
from subsidiary

e Minority Interest Expense 8,400
Dividends – Sharp 3,000
Minority Interest 5,400
To enter minority interest share of subsidiary
income and dividends

f Retained Earnings – Sharp 200,000
Capital Stock – Sharp 400,000
Investment in Sharp 540,000
Minority Interest – Beginning 60,000
To eliminate reciprocal investment and
equity balances

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.

Working Paper Entries:
Year of Sale
Sales 200,000
Cost of Sales 150,000
Equipment 50,000
To eliminate intercompany sales and to reduce
cost of sales and equipment for the cost and
gross profit, respectively

Year of Sale
To eliminate depreciation on the gross profit from
the sale ($50,000 ÷ 5)

Second Year
Investment in Santana 40,000
Equipment 50,000
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

End of Chapter 6

Bclaa8e ab.az.chapter 06

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