Intercompany Profit Transactions Plant Assets Iman P.

Hidayat

2009 Accounting Department, University Of Siliwangi

Intercompany Profits on Nondepreciable Plant Assets

Company P

Company S

Nondepreciable asset

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.
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 subsidiarys income.
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. Stans net income for 2005: $70,000 Parks income (excluding Stans income): $90,000 Parks income includes a $10,000 unrealized gain from sale of land to Stan that cost $40,000.
2009 Accounting Department, University Of Siliwangi

Downstream Sale of Land

Investment in Stan 63,000 Income from Stan 63,000 To record 90% of Stans reported income
2009 Accounting Department, University Of Siliwangi

Downstream Sale of Land

Cash 50,000 Land 40,000 Gain 10,000 To record sale of land to Stan 0ffset Income from Stan 10,000 Investment in Stan 10,000 To eliminate unrealized profit on land sold to Stan
2009 Accounting Department, University Of Siliwangi

Working Papers December 31, 2005

Income Statement

Park

Adjustments/ ConsolStan Eliminations idated

Sales $380 Income from Stan 53 Gain on sale of land 10 Expenses (300) Minority interest expense ($70,000 10%) Net income $143 Retained earnings Park $207 Retained earnings Stan Add: Net income 143 Retained 12/31 $350 2009 Accountingearnings Department, University Of Siliwangi

$220
b 53 a 10 (150) c 7 $ 70

$600
(450) (7) $143 $207 143 $350
8

$100 d 100 70 $170

Working Papers December 31, 2005

Balance Sheet

Park

Adjustments/ ConsolStan Eliminations idated

Other assets Land Investment in Stan

Liabilities Capital stock Retained earnings Minority interest

$477 $350 50 323 $800 $400 $ 50 $ 30 400 200 d 200 350 170

a 10 b 53 d 270

$827 40 $867 $ 80 400 350

c 7 d 30
$800 $400

2009 Accounting Department, University Of Siliwangi

37 $867
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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.
2009 Accounting Department, University Of Siliwangi

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Upstream Sale of Land

Investment in Stan 63,000 Income from Stan 63,000 To record 90% of Stans reported net income Income from Stan 9,000 Investment in Stan 9,000 To eliminate 90% of the unrealized profit on land purchased from Stan
2009 Accounting Department, University Of Siliwangi

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Working Papers December 31, 2005

Income Statement

Park

Adjustments/ ConsolStan Eliminations idated

Sales $390 Income from Stan 54 Gain on sale of land Expenses (300) Minority interest expense ($70,000 10%) Net income $144 Retained earnings Park $207 Retained earnings Stan Add: Net income 144 Retained 12/31 $351 2009 Accountingearnings Department, University Of Siliwangi

$210
b 54 10 a 10 (150) c 6 $ 70

$600
(450) (6) $144 $207 144 $351
12

$100 d 100 70 $170

Working Papers December 31, 2005

Balance Sheet

Park

Adjustments/ ConsolStan Eliminations idated

Other assets Land Investment in Stan

Liabilities Capital stock Retained earnings Minority interest

$427 $400 50 324 $801 $400 $ 50 $ 30 400 200 d 200 351 170

a 10 b 54 d 270

$827 40 $867 $ 80 400 351

c 6 d 30
$801 $400

2009 Accounting Department, University Of Siliwangi

36 $867
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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?
2009 Accounting Department, University Of Siliwangi

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Downstream Sale of Depreciable Plant Assets

Cash 80,000 Accumulated Depreciation 40,000 Machinery Gain on Sale of Machinery To record sale of machine to Soper
2009 Accounting Department, University Of Siliwangi

90,000 30,000

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Downstream Sale of Depreciable Plant Assets

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
2009 Accounting Department, University Of Siliwangi

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Downstream Sale of Depreciable Plant Assets

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

2009 Accounting Department, University Of Siliwangi

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Working Papers Adjustment

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

2009 Accounting Department, University Of Siliwangi

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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
2009 Accounting Department, University Of Siliwangi

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Sale in Subsequent Year to Outside Entity

Investment in Stan 10,000 Income from Stan 10,000 To recognize previously deferred profit on sale to Stan
2009 Accounting Department, University Of Siliwangi

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Sale in Subsequent Year to Outside Entity

Cash 65,000 Land Gain To record sale of land

2009 Accounting Department, University Of Siliwangi

50,000 15,000

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Sale in Subsequent Year to Outside Entity

Investment in Stan 10,000 Gain on Land 10,000 To adjust gain on land to the $25,000 gain to the consolidated entry
2009 Accounting Department, University Of Siliwangi

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Upstream Sale of Land: Minority Interest

Stans reported net income: $70,000

70,000

$63,000 to Park
2009 Accounting Department, University Of Siliwangi

$7,000 to MI
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Upstream Sale of Land: Minority Interest

Stans reported net income: Unrealized gain: Realized net income:
60,000

$70,000 10,000 $60,000

$54,000 to Park
2009 Accounting Department, University Of Siliwangi

$6,000 to MI
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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.
2009 Accounting Department, University Of Siliwangi

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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.
2009 Accounting Department, University Of Siliwangi

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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
2009 Accounting Department, University Of Siliwangi

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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 2009 Accounting Department, University Of Siliwangi
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Working Paper Entries

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

2009 Accounting Department, University Of Siliwangi

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Working Paper Entries

b Investment in Sharp 14,400 Minority Interest January 1 1,600 Accumulated Depreciation 8,000 Depreciation Expense 4,000 Equipment 20,000 To eliminate unrealized profit on upstream sale of equipment
2009 Accounting Department, University Of Siliwangi

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Working Paper Entries

c Gain on Buildings 32,000 Accumulated Depreciation 4,000 Buildings 32,000 Depreciation Expense 4,000 To eliminate unrealized gain on the downstream sale of buildings
2009 Accounting Department, University Of Siliwangi

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Working Paper Entries

d Income from Sharp 52,600 Dividends 27,000 Investment in Sharp 25,600 To eliminate income and dividend from subsidiary
2009 Accounting Department, University Of Siliwangi

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Working Paper Entries

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

2009 Accounting Department, University Of Siliwangi

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Working Paper Entries

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
2009 Accounting Department, University Of Siliwangi

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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 Pacos 100%-owned subsidiary.
The computer has a five-year expected useful live.

2009 Accounting Department, University Of Siliwangi

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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
2009 Accounting Department, University Of Siliwangi

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Working Paper Entries: Year of Sale

Accumulated Depreciation 10,000 Depreciation Expense 10,000 To eliminate depreciation on the gross profit from the sale ($50,000 5)

2009 Accounting Department, University Of Siliwangi

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Working Paper Entries: Second Year

Investment in Santana 40,000 Accumulated Depreciation 20,000 Equipment 50,000 Depreciation Expense 10,000 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
2009 Accounting Department, University Of Siliwangi

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