ACG5205 Lecture Ch.07 - Christensen 12e

Chapter 7
Intercompany
Transfers
of Services and
Noncurrent Assets
ACG5205
Text: Christensen et al., Adv Acctg 12e
Learning Objective 7-1
Understand and explain

concepts associated with
transfers of services and
long-term assets.
7-2
Summary of GAAP Requirements for Consolidation
 All intercompany transactions must be eliminated in
consolidation.
 The full amount of unrealized intercompany profit or gain must
be eliminated.
 The deferral is shared with NCI shareholders in upstream, but not
downstream, transactions.
 Reported amount for PP&E or long-term productive assets

cannot change merely because the asset has been moved to a
different location within the consolidated group.
 For the consolidated entity, earnings process is complete only
when it makes a sale to an external party.
 Objective:
 Undo the transfer.
 Make it appear as if we only change (if changed) the estimated useful life of
asset.
7-3
Different Asset Types
 Non-depreciable Assets
 The transfer of non-depreciable assets is very similar
to the transfer of inventory, but likely affects more
years
 Adjust transferred asset back to old basis
 Eliminate unrealized gain/loss recorded by Seller
 Depreciable Assets
 Eliminate the seller’s gain (or loss)  unrealized
 Adjust transferred asset back to old basis
 Adjust depreciation back to what it would have
otherwise been if the original owner (i.e., the seller)
had depreciated the asset based on the revised (if
revised) estimate of useful life
7-4
Intercompany Transfers of Services
 The purchaser typically records an expense and the

seller records a revenue.
 In the consolidation worksheet, an eliminating entry
would be needed to reduce both revenue (debiting)
and expense (crediting).
 Because the revenue and expense are equal and both
are eliminated, consolidated income is unaffected by
the elimination.
 The elimination is still important because otherwise
both consolidated revenues and expenses are
overstated.
7-5
Prepare simple equity-

method journal entries
related to an intercompany
land transfer.
7-6
Intercompany Land Transfers
 When intercompany transfers of noncurrent assets occur, the
parent company must make adjustments in preparation of
consolidated financial statements for as long as the acquiring
company holds the assets.
 When related companies transfer land at book value, no
special adjustments are needed in preparing the consolidated
financial statements.
 When intercompany gains or losses on asset transfers occur,
the parent company can choose to use the fully adjusted
equity method, which requires it to adjust its investment
and income from subsidiary accounts to remove the
unrealized gains/losses.
7
Example 2: 100 Percent Ownership Land Transfer
 On 3/31/X5, Parker Inc. sold land costing $40,000 to its
100 percent–owned subsidiary, Stubben Inc., for $100,000.
 Now assume Parker adjusts for this transaction in the
equity accounts.
 This is the fully adjusted equity method!
 How would your answers change?
Required:
1. Prepare the consolidation entry(ies) as of 12/31/X5 and
12/31/X6.
2. Prepare the consolidation entry at 12/31/X7, assuming that
Stubben sold the land in 20X7 for $120,000.
7-8
Example : 100 Percent Ownership Land Transfer
On 3/31/X5, Parker Inc. sold land costing $40,000 to its

100percent–owned subsidiary, Stubben Inc., for
$100,000.
In 20X7
$40k Parker $100k Stubben $120k
“Fake” Gain = $60k Gain = $20k
Total Gain = $80k

7-9
Developing PP&E Asset Transfer 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.
7-10
Example: 100 Percent Ownership Land Transfer
On 3/31/X5, Parker Inc. sold land costing $40,000 to its

100 percent–owned subsidiary, Stubben Inc., for
$100,000.
Gain on
Land Sale of Land
100,000 “Actual” 60,000
60,000 60,000
40,000 “As if” 0
Consolidation Entry for 20X5 (year of transfer):

Gain on the Sale of Land 60,000
Land 60,000
7-11
Example: ONE EXTRA STEP! Equity Method Adjustment
Investment in Sub Income from Sub
NI $$$ $$$ NI
60,000 Unreal. 60,000
Gain
This defers the

gain until sold later
Equity Method Entry – 20x5:

Dr. Income from Sub 60,000
Cr. Investment in Sub 60,000
(similar to defer unrealized GP for inventory transfer)
7-12
Example: Consolidation Entry at 12/31/20X5
Requirement 1:
Parker Stubben
Assets = Liabilities + Equity Assets = Liabilities + Equity
Invest. 60k Gain +60k Land +60k
Income from Sub 60
• The equity method adjustment “fixes” parent’s books!
What happens to the equity method accounts?
• Eliminated in the consolidation. But we still need to fix the problem!
Consolidation Entry at 12/31/X5
Same!
Gain on Sale of Land 60,000
Land 60,000
What happens to the gain AND Income from Sub?
Invest 60 RE correct Land +60 They cancel out!
7-13
Requirement 1:
Parker Stubben
Invest 60 Land +60
Investment In Sub Land

Lower by 60,000 “Actual” 100,000
60,000 60,000
Normal “As if” 40,000
Balance
Consolidation Entry at 12/31/X6 (and all years until land is sold)

Investment 60,000
Land 60,000
7-14
Requirement 1:
Parker Stubben
Invest. 60k Gain +20
Investment In Sub Gain on Sale

Low by 60,000 “Actual” 20,000
60,000 60,000
Balance
What gain should Stubben report in 20X7 when the land is resold?
Consolidation Entry at 12/31/X7 (Stubben resold the land in 20X7)
Investment 60,000
Gain on Sale 60,000
7-15
Example: Solution Summary
(fully-adjusted equity method)
Requirement 1
Land 60,000

Investment in Stubben 60,000
Land 60,000
Requirement 2
7-16
Learning Objective 3
Prepare equity-method journal

entries and consolidation
entries for the consolidation of a
subsidiary following a
downstream land transfer.
17
Exercise 1: Partial Ownership Land Transfer -
Downstream
 Stubben Corporation is a 90%-owned subsidiary of Parker
Corporation, acquired for $270,000 on 1/1/X5.
 Investment cost was equal to book value and fair value.
 Stubben’s net income in 20X5 was $70,000, and Parker’s
operating income, excluding its investment income from
P
Stubben, was $90,000.
 Parker’s 20X5 operating income above includes a $10,000
unrealized gain on land that cost $40,000 and was sold to
NCI
Stubben for $50,000. 90%
 Assume that Stubben sold the land in 20X7 for $65,000.
Assume Parker adjusts for this transaction in the equity 10%
accounts.
NOTE: This is a downstream transaction. Any related deferral is
not shared with NCI. Fully-adjusted equity method used.
Required:
S
1. What entry(ies) would Parker make in 20X5 and 20X7?
2. Prepare the consolidation entries at 12/31/X5, 12/31/X6,
and 12/31/X7.
18
Exercise 1: Solution
Requirement 1 – Fully Adjusted Equity Method Entries

20X5 Equity Method Entries
Income from Stubben 63,000
(record Parent’s 90% share of Sub’s NI as reported)

(defer Unrealized gain on land transferred to Sub;
Downstream transfer – Not shared with NCI)
20X7 Equity Method Entry (after Stubben resold the land)
to reverse deferral of unrealized gain recorded in 20x5
19
Exercise 1: 90% Consolidation Entry at 12/31/X5
Parker’s 20x5 income includes a $10,000 unrealized

gain on land that cost $40,000 and was sold to Stubben
for $50,000.
Gain on
Land Sale of Land
50,000 “Actual” 10,000
10,000 10,000
40,000 “As if” 0
Consolidation Entry for 20X5:

Gain on the Sale of Land 10,000
Land 10,000
7-20
Investment In Sub Land

Low by 10,000 “Actual” 50,000
10,000 10,000
Balance
Consolidation Entry at 12/31/X6 (and all years until land is sold)

Investment 10,000
Land 10,000
7-21
Investment In Sub Gain on Sale

Low by 10,000 “Actual” 15,000
10,000 10,000
Balance

Investment 10,000
Gain on Sale 10,000
7-22
Exercise 1: Solution Summary
Requirement 2 – Consolidation Entries
Consolidation Entry at 12/31/X5 (year of transfer)

Land 10,000
Consolidation Entry at 12/31/X6 (land still held by Stubben, the Sub)

Land 10,000
Consolidation Entry at 12/31/X7 (Stubben resold the land in 20X7;

so, the $10,000 gain that was unrealized and deferred is now realized)

23

entries and consolidation
entries for the consolidation of a
subsidiary following an
upstream land transfer.
7-24
Upstream Sale of Land (1 of 3)
 When an upstream transfer of land results in the recording of an
intercompany gain on the subsidiary’s books, the gain is
unrealized until the land is resold to a non-affiliate party and must
be eliminated during consolidation, similar to downstream
transfer.
 However, the elimination of the unrealized gain consolidation

reduces both the parent and the NCI shares in proportion to their
ownership % (i.e., the deferral of gain is shared with NCI)
 When the asset is not resold to a non-affiliate before the end of the
period, consolidation entries are different from the downstream
case only by the allocation of the unrealized gain to both the
parent and NCI. All the parent’s equity-method entries and the
consolidation entries in the consolidation worksheet are identical
to those in the downstream case
7-25
Exercise 2: Partial Ownership Land Transfer -
Upstream
 Stubben Corporation is a 90%-owned subsidiary of
Parker Corporation, acquired for $270,000 on 1/1/X5.
 Investment cost was equal to book value and fair value.
P
 Stubben’s net income in 20X5 was $70,000, and
Parker’s operating income, excluding its income from
Stubben, was $90,000.
NCI
 Stubben’s 20X5 net income above includes a $10,000 90%
unrealized gain on land that cost $40,000 and was
sold to Parker for $50,000 (upstream; deferral shared 10%
with NCI).
 Assume that Parker sold the land in 20X7 for $65,000.
 Assume Parker fully adjusts for this transaction in the
equity accounts.
S
Required:
1. What entry(ies) would Parker make in 20X5 and 20X7?
2. Prepare the consolidation entries at 12/31/X5,
12/31/X6, and 12/31/X7.
26
Partially Owned Upstream Sales Equity Method Adjustment
 Similar to what we did with inventory transfers: we

must share deferral with the NCI shareholders
P
 Simply split up the adjustment for unrealized gains
proportionately.
NCI
Equity 90%
Method
Adjustments 10%
Investment in Income from
S
Stubben Stubben
NI 63,000 63,000 NI
9,000 Unreal. Gain 9,000
54,000
Unreal. 1,000 Gain To NCI Shareholders

27
Solution: Parker Company Equity Method Journal
Entries
Requirement 1: Fully Adjusted Equity Method Entries
20X5 Equity Method Entries

(Parent’s 90% of Sub’s reported NI)

Investment in Stubben 9000
(Defer parent’s 90% share of unrealized gain)
20X7 Equity Method Entry (after Parker resold the land)

(to reverse the effect of gain deferral recorded in 20x5,
because the land now sold and gain realized)
28
Solution: Consolidation Journal Entries
Requirement 2
Land 10,000

NCI in NA of Stubben 1,000
Land 10,000
Consolidation Entry at 12/31/X7 (Parker resold the land in 20X7)

NCI in NA of Stubben 1,000
29

entries and consolidation entries
for the consolidation of a
subsidiary following a
downstream depreciable asset
transfer.
30
Transfers of Depreciable Assets
 The major difference between depreciable and non-depreciable
assets:
 Depreciation!
 You have a “moving target” of unrealized gain/loss instead of a stationary
target. But, the concepts are the same!
 The deferred unrealized gain/loss considered realized gradually as the asset is
being used in operation by the buyer.
 Adjust for:
 Unrealized gain/loss (same as with land). and
 Difference in depreciation expenses
 The goal is to get back to the asset’s old basis “as if ” it were still on
the books of the original owner.
 For Consolidation, depreciation must be based on the cost of the asset to the
consolidated entity (i.e., the asset’s cost to the affiliate company that
originally purchased it from an outsider).
 One difference—depreciation going forward based on the new estimated
remaining useful life and salvage value (if estimates revised)
 Same as a change in depreciation estimates on any company’s books
31
Developing Depreciable Asset Elimination Entries
 Compare “Actual” with “As if ”

 “Actual” = How the transferred asset and related accounts
actually appear on the individual 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 consolidation
elimination entry or entries.
 In other words, consolidation elimination entries are
needed to
 Adjust the transferred asset to its original basis
 Adjust the associated accumulated depreciation and
depreciation expense based on original cost, as if no transfer
occurred.
 Remove effect of unrealized gain/loss on the transfer
32
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).
33
Example 3: “End of Year” Transfer –
Downstream
Assume Padre Corp. purchased a machine on 1/1/20X1 for
$100,000 and estimated that the machine would have a useful
life of 10 years with no salvage value. After two years, on
12/31/20X2, Padre Corp. sold the machine to its 100% owned
subsidiary, Sonny Co., for $90,000. Sonny Co. estimated that the
asset had a remaining useful life of five years.
What is the amount of the gain or loss recorded by Padre at
the time of the machine transfer?
Accumulated
Machine Depreciation
Sale:
100,000 20,000
Proceeds $90,000
 Book Value 80,000
Book Value = 80,000 Gain $ 10,000
34
Example 3: End of Year Transfer
What accounts and balances actually exist (i.e., as recorded by
individual entities) right after the asset transfer on 12/31/x2?
Accumulated
Machine Depreciation Gain on Sale
90,000 “Actual” 0 10,000
35

What balances would have existed if the transfer had not taken
place (i.e., from consolidation perspective) on 12/31/x2?
Accumulated
90,000 “Actual” 0 10,000
100,000 “As if” 20,000 0
36
The worksheet entry on 12/31/X2 to eliminate the asset

transfer is simply the “adjustment” to change from “actual”
to “as if” the asset hadn’t been transferred.
Consolidation Entry:
Gain on Sale 10,000
Machine 10,000
Accumulated Depreciation 20,000
Accumulated
90,000 “Actual” 0 10,000

10,000 20,000 10,000
100,000 “As if” 20,000 0
37
Example 4: “Beginning of Year” Transfer
How much depreciation expense will Sonny actually record in 20X3?
Actual Depreciation Expense = (Cost – SV) / # years left
= (90,000 – 0) / 5 years = $18,000
How much depreciation expense would Padre have recorded in 20X3
if it had retained the machine and simply changed the estimated life to
five years?
“As if” Depreciation Expense = (BV – SV) / # years left
= (80,000 – 0) / 5 years = $16,000
38
Example 4: Beginning of Year Transfer

Sonny’s 20X3 expense can be separated into two parts:

 The portion associated with the original book value from Padre’s books.
 The portion associated with the extra amount paid by Sonny above
Padre’s book value (i.e., the gain).
Gain = 10,000  5 = 2,000 Extra Depreciation#

Book Value = 80,000  5 = 16,000 Padre’s Depreciation
18,000 Total Sonny’s Depreciation#
7-39

How do we “fix” the depreciation expense for 20X3 so that it
will appear “as if” the asset had not been transferred?
In other words, how do we eliminate the “extra”
depreciation expense?
Gain = 10,000  5 = 2,000 Extra Depreciation

Book Value = 80,000  5 = 16,000 Padre Depreciation
18,000 Total Sonny Depreciation
40

Depreciation Accumulated
Expense Depreciation
18,000 “Actual” 18,000
2,000 2,000
16,000 “As if” 16,000
Consolidation Entry on 12/31/20X3:

Depreciation Expense 2,000
41

In addition to the depreciation adjustment, the asset’s basis needs to be
adjusted and the gain eliminated. What accounts and balances actually
exist after the asset transfer? On 12/31/20X3
Accumulated
90,000 “Actual” 18,000 10,000
42

What balances would have existed if the transfer hadn’t taken
place? On 12/31/20X3
Accumulated
90,000 “Actual” 18,000 10,000
100,000 “As if” 36,000# 0

(20,000+16,000)
43
There are two worksheet entries on 12/31/X3 to compare

“actual” to “as if” to make it appear like the asset hadn’t been
transferred. What is the second elimination entry?
Second Consolidation Entry:
Gain on Sale 10,000
Equipment 10,000
Accumulated
90,000 “Actual” 18,000 10,000
10,000 2,000 20,000 10,000
100,000 “As if” 36,000 0
44
Example 5: Partial Ownership Depreciable Asset
Transfer at the End of the Year - Downstream
On Pericles Corporation sells machinery to its 80%-owned
subsidiary, Sophocles Corporation, on 12/31/20X4. The
machinery has a book value of $60,000 on this date (cost
$120,000 and accumulated depreciation $60,000), and it is
sold to Sophocles for $90,000. Thus, this transaction produces
an unrealized gain of $30,000. Assume that Pericles adjusts its
equity method accounts accordingly.
Note: Transfer is on last day of the year.
Required:
NCI
80%
P
1. What equity-method journal entry would 20%
Pericles make on its books to adjust for the
2.
unrealized gain from this transaction?
What consolidation worksheet entry would
Pericles make to consolidate on this date?
S
45
Accumulated
Equipment Depreciation
120,000 60,000
Sale:
Proceeds $90,000
Book Value = 60,000
Unrealized Gain $ 30,000
Income from
Investment in Sub Sub
30,000 Defer Gain 30,000
Requirement 1: Equity Method Entry
Income from Sub 30,000

Investment in Sub 30,000
(to remove/defer the effect of unrealized gain on parent’s books)
(Downstream Transfer – No sharing with NCI)
46
Accumulated
Sub 90,000 “Actual” 0
30,000 60,000
Parent 120,000 “As if” 60,000
Requirement 2: Consolidation Worksheet Entry

Gain on Sale 30,000
Equipment 30,000
(to remove the effect of unrealized gain and restore the
equipment to its original basis during consolidation)
47
Example 6: Depreciable Asset Transfer at
Beginning of Year 20X4 - Downstream
Given all other information from the previous example, assume
that the transfer takes place on 1/1/20X4. Also, assume that
as of the date of transfer, the machinery has a five-year
remaining useful life (with no residual value) and that
Sophocles uses straight-line depreciation. In addition to the
journal entries to record the transfer of the asset, Sophocles
also records depreciation expense of $18,000 for 20X4
($90,000 / 5 years). (partial ownership, downstream)
Note: Transfer is on first day of the year on 1/1/20X4.
Required:
1. What journal entry(ies) would Pericles make on its books to
adjust for the unrealized gain from this transaction?
2. What worksheet entry(ies) would Pericles make to
consolidate on this date?
48
Example 6: Depreciable Asset Transfer at Beginning of Year
Unreal. Gain = 30,000  5 = 6,000 Extra Depreciation
Book Value = 60,000  5 = 12,000 Parent Depreciation
18,000 Total Depreciation
Requirement 1 – Equity Method Entries:

Of the $18,000 of depreciation recorded, $12,000 is based
on the BV at the time of transfer and $6,000 is based on the
unrealized gain component. We can think of the $6,000 as
the cancelation of 1/5 of the unrealized gain (i.e., 1/5 of
unrealized gain is now considered “realized” after one
year).
49
Example 6: Depreciable Asset Transfer at Beginning of Year
Investment in Sub Income from Sub

30,000 Defer Gain 30,000
6,000 Reverse Extra 6,000
Depreciation
Equity Method Entries (Year of Transfer):

(at time of transfer to defer unrealized gain)
(after one year to reverse 1/5 of gain deferral; Not
shared with NCI in Downstream transfer)
50
Example 6: Depreciable Asset Transfer at
Beginning of Year 20X4
Accumulated
Sub 90,000 “Actual” 18,000
30,000 6,000 60,000
Parent 120,000 “As if” 72,000

Requirement 2: End of Year 1 (20X4) Consolidation Entries
Gain on Sale 30,000

Equipment 30,000
(to remove the effect of unrealized gain and restore the equipment
to its original basis during consolidation)
(reverse one-fifth of deferred gain) 51
Example 6: Subsequent Years
Given all other information from the previous examples,
consider what happens in the last 5 years of the asset’s
useful life. Think about both the equity method entry
Pericles would have to make each year and what
elimination entry would be made each year.
Note: Transfer is downstream on 1/1/20X4.

Required:
1.What equity-method journal entry would Pericles make
on its books to adjust for the unrealized gain from this
transaction on 12/31/X5?
2. What worksheet entry(ies) would Pericles make to
consolidate on 12/31/X5?
52
Solution 6: Subsequent Years
Requirement 1:
Pericles will continue to extinguish (reverse) $6,000 (1/5)
of the unrealized gain each year to its equity accounts.
Equity Method Entry for each of all Subsequent

Years 20X5~X8:
53
Example 6: Subsequent Years (20X5 – 20X8)
Investment How much of the deferral is left at

in Sophocles the beginning of each year?
24,000 20X5 Investment in Sub 6,000
(Yr 2) Income from Sub 6,000
6,000

6,000 Income from Sub 6,000
0
Note: These are equity-method entries
actually recorded by the Parent.
54
Solution 6: Subsequent Years – 20X5
Accumulated Investment
Equipment Depreciation in Sophocles
Sub 90,000 “Actual” 36,000 Low 24,000
30,000 6,000 54,000 24,000
Regular
“As if” 84,000
Balance
Requirement 2: Worksheet Entries 20X5

Investment in Sophocles 24,000
Equipment 30,000

55
Example 6: Subsequent Years 20X6~X8
Accumulated
20X6 Worksheet Entries: Equipment Depreciation
Equipment 30,000 Sub 90,000 “Actual” 54,000
Accumulated Depreciation 48,000 30,000 6,000 48,000
Accumulated Depreciation 6,000 Parent 120,000 “As if” 96,000

Accumulated
20X7 Worksheet Entries: Equipment Depreciation
Accumulated Depreciation 42,000 30,000 6,000 42,000
Depreciation Expense 6,000 Parent 120,000 “As if” 108,000
20X8 Worksheet Entries: Accumulated

30,000 6,000 36,000
Depreciation Expense 6,000 Parent 120,000 “As if” 120,000
7-56

entries and elimination entries for
the consolidation of a subsidiary
following an upstream
depreciable asset transfer.
7-57
Example 7: Upstream with Partial Ownership
Depreciable Asset Transfer at Beginning of Year 20X6
On 1/1/X6, Snoopy (an 85%-owned subsidiary of Peanut)
sold equipment costing $150,000 to Peanut for $90,000. At
the time of the sale, the equipment had accumulated
depreciation of $110,000. Peanut continued depreciating
the equipment using the straight-line method and assigned a
remaining useful life of five years.
Note: Transfer is on first day of the year.
Required:
1. What equity-method journal entry would
NCI
85%
P
Peanut make on its books each year to adjust 15%
for the unrealized gain from this transaction?
2. What worksheet entry would Peanut make each
year to consolidate on this date?
S
58
Example 7: Computations
Equipment Accumulated Depreciation
150,000 110,000 Peanut
NCI
85%
Sale: 15%
Proceeds $90,000
Unrealized Gain $ 50,000 Snoopy
Gain = 50,000 5= 10,000 Extra Depreciation/yr

Book Value = 40,000 5= 8,000 Sub’s Depreciation
18,000 Total Depr. by Parent (As If)
59
Solution 7: Peanut (parent) Co. Equity Method
Journal Entries – Upstream Beg. of Yr Transfer
Investment in Snoopy Income from Snoopy

42,500 Defer Gain 42,500
85%
8,500 Extra Depr. 8,500
Income from Snoopy 42,500

Year 1 Investment in Snoopy 42,500
(20X6) (Defer unrealized gain at time of transfer at Beginning
of Year 1 (20X6); Upstream, deferral shared with NCI)
Investment in Snoopy 8,500

Income from Snoopy 8,500
(Reverse 1/5 of deferred gain for 20X6 -- after one year;
and all subsequent years -- Parent’s 85% portion)
60
Solution: Peanut Company Equity Method
Journal Entries
How much of Parent’s 85% portion of deferral is
Investment left at the beginning of each year?
in Snoopy
34,000 Year 2 Investment in Snoopy 8,500
8,500 (x7) Income from Snoopy 8,500
0
61
Example 7: Consolidation Worksheet Entries
Year 1 Gain on Sale 50,000

(Beg. of Yr
Transfer – 20x6) Equipment 60,000

Accumulated
Equipment Depreciation Gain on Sale
Peanut 90,000 “Actual” 18,000 50,000
60,000 10,000 110,000 50,000
Snoopy 150,000 “As if” 118,000 0
7-62

(20X7) NCI in NA of Snoopy 6,000
Equipment 60,000

Equipment Depreciation in Snoopy
Peanut 90,000 “Actual” 36,000 Low 34,000
60,000 10,000 100,000 34,000
Regular
Snoopy 150,000 “As if” 126,000
Balance
7-63

Equipment 60,000

60,000 10,000 90,000 25,500
Regular
Snoopy 150,000 “As if” 134,000
Balance
7-64

Equipment 60,000

60,000 10,000 80,000 17,000
Regular
Snoopy 150,000 “As if” 142,000
Balance
7-65

Equipment 60,000

60,000 10,000 70,000 8,500
Regular
Snoopy 150,000 “As if” 150,000
Balance
7-66
Intercompany Transfers of Amortizable Assets
 Accounting for intangible assets usually differs

from accounting for tangible assets in that
amortizable intangibles normally are reported
at the remaining unamortized balance
without the use of a contra account.
 Other than netting the accumulated
amortization on an intangible asset against the
asset cost, the intercompany sale of intangibles
is treated the same way in consolidation as the
intercompany sale of tangible assets.
67

ACG5205 Lecture Ch.07 - Christensen 12e

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ACG5205 Lecture Ch.07 - Christensen 12e

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Chapter 7

Understand and explain

 Reported amount for PP&E or long-term productive assets

 The purchaser typically records an expense and the

Prepare simple equity-

On 3/31/X5, Parker Inc. sold land costing $40,000 to its

$40k Parker $100k Stubben $120k

“Fake” Gain = $60k Gain = $20k

Total Gain = $80k

 Compare “Actual” with “As if ”

 The difference between the two gives the

On 3/31/X5, Parker Inc. sold land costing $40,000 to its

Consolidation Entry for 20X5 (year of transfer):

Investment in Sub Income from Sub

This defers the

Equity Method Entry – 20x5:

Investment In Sub Land

Consolidation Entry at 12/31/X6 (and all years until land is sold)

Investment In Sub Gain on Sale

Consolidation Entry at 12/31/X6

Prepare equity-method journal

Requirement 1 – Fully Adjusted Equity Method Entries

Income from Stubben 10,000

Parker’s 20x5 income includes a $10,000 unrealized

Consolidation Entry for 20X5:

Investment In Sub Land

Consolidation Entry at 12/31/X6 (and all years until land is sold)

Investment In Sub Gain on Sale

Consolidation Entry at 12/31/X7 (Stubben resold the land in 20X7)

Requirement 2 – Consolidation Entries

Consolidation Entry at 12/31/X5 (year of transfer)

Consolidation Entry at 12/31/X6 (land still held by Stubben, the Sub)

Consolidation Entry at 12/31/X7 (Stubben resold the land in 20X7;

Investment in Stubben 10,000

Prepare equity-method journal

 However, the elimination of the unrealized gain consolidation

 Similar to what we did with inventory transfers: we

Unreal. 1,000 Gain To NCI Shareholders

20X5 Equity Method Entries

Income from Stubben 9,000

20X7 Equity Method Entry (after Parker resold the land)

Consolidation Entry at 12/31/X6

Consolidation Entry at 12/31/X7 (Parker resold the land in 20X7)

Prepare equity-method journal

 Compare “Actual” with “As if ”

 What’s not relevant?

90,000 “Actual” 0 10,000

Assume Padre Corp. purchased a machine on 1/1/20X1 for

90,000 “Actual” 0 10,000

100,000 “As if” 20,000 0

The worksheet entry on 12/31/X2 to eliminate the asset

90,000 “Actual” 0 10,000

100,000 “As if” 20,000 0

Assume Padre Corp. purchased a machine on 1/1/20X1 for

Sonny’s 20X3 expense can be separated into two parts:

Gain = 10,000  5 = 2,000 Extra Depreciation#

Assume Padre Corp. purchased a machine on 1/1/20X1 for

Gain = 10,000  5 = 2,000 Extra Depreciation

Assume Padre Corp. purchased a machine on 1/1/20X1 for

16,000 “As if” 16,000

Consolidation Entry on 12/31/20X3:

Assume Padre Corp. purchased a machine on 1/1/20X1 for

Assume Padre Corp. purchased a machine on 1/1/20X1 for