CHAPTER 6

INTERCOMPANY TRANSACTIONS – PROPERTY, PLANT & EQUIPMENT

Intercompany gains & losses from sales of property,

plant, & equipment must be eliminated (deferred) until
either realized, or the asset is sold to outside the
consolidated entity. In addition, the cost (or book
value) of the asset must be adjusted to that of the
original buyer on the consolidated work-paper.

A simple illustration:

P sells land to S for $10,000

Cost of land to P 7,500
Gain on intercompany sale $ 2,500

Books of P

Books of S

On the consolidated workpaper, one must:

i) eliminate the gain on P’s books, and
ii)reduce the cost of the land to P’s cost.

Consolidated workpaper:

Recognition of gain/loss:

NONDEPRECIABLE PPE (Land): The consolidated entity

should recognize the deferred gain/loss when the land is
sold to outside the consolidated entity.
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 DEPRECIABLE PPE (Equipment): The consolidated entity
should recognize the deferred gain/loss on a piecemeal
basis over the life of the asset as it expires.

I. EQUIPMENT (UPSTREAM SALE)

A. Year of Sale

The following information summarizes the relation and transactions

between P Company and its 90% owned subsidiary, S Company, during
20X2.

1. On January 1, 20X2, S Company sells to P Company equipment

with a book value of $750,000 (original cost $1,350,000 and
accumulated depreciation of $600,000) for $900,000.

2. On the date of sale, the equipment has an estimated remaining

useful life of three years, no residual value, and is
depreciated using the straight-line method.

3. No other equipment is owned by S Company or P Company.

Journal Entries

Books of P Company Books of S Company

Equipment 900,000 Cash 900,000

Cash 900,000 Accum. Dep. 600,000
Equipment 1,350,000
Dep. Expense 300,000 Gain on Equip. 150,000
Accum. Dep. 300,000

Consolidation Working Papers

P Company and Subsidiary
for year ended 12/31/20X2

P Company S Company Debit Credit Consol.

Income Statement
Gain on
Equipment --- 150,000 a 150,000 -0-
Depreciation
Expense 300,000 --- b 50,000 250,000

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Balance Sheet

Equipment 900,000 --- a 150,000 750,000

Accumulated
Depreciation 300,000 --- b 50,000 250,000

(a) To eliminate unrealized gain on inter-company sale of equipment.

(b) To realize 1/3 of gain on inter-company sale of equipment.

Entries on Books of Company P: Equity Method

To defer unrealized gain of inter-company sale of equipment:

INCOME FROM S 135,000

INVESTMENT IN S COMPANY 135,000

To realize 1/3 of gain on inter-company sale of equipment:

INVESTMENT IN S COMPANY 45,000

INCOME FROM S 45,000

B. Year Subsequent to Sale

Assume that during 20x3, there were no inter-company sales of

equipment between P Company and S Company.

Journal Entries
P Company

12/31/x3 Depreciation Expense 300,000

Accumulated Depreciation 300,000

Consolidation Working Papers

P Company and Subsidiary
for year ended 12/31/20X3

Income State. P Company S Company Debit Credit Consol.

Depreciation
Expense 300,000 --- b 50,000 250,000
Balance Sheet

Equipment 900,000 --- a 150,000 750,000

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Accumulated b 50,000
Depreciation 600,000 --- a 50,000 500,000
Investment in
S Company xxx a 90,000
Noncontrolling
Interest a 10,000

(a) To adjust the cost of the equipment to its B-O-P book value and
to establish reciprocity between the Investment account and the
equity of S Company
(b) To realize 1/3 of gain on inter-company sale of equipment.

Entries on Books of Company P: Equity Method

INVESTMENT IN S COMPANY 45,000

INCOME FROM S 45,000
II. INTER-COMPANY TRANSACTIONS – INVENTORY & PPE

Problem 6-3 Beams, Anthony, Bettinghaus, & Smith, Advanced Accounting, 12th ed.

Par Corporation acquired a 90 percent interest in Sag Corporation’s outstanding voting

common stock on January 1, 2011, for $630,000 cash. The stockholders’ equity of Sag
on this date consisted of $500,000 capital stock and $200,000 retained earnings.

The financial statements of Par and Sag at and for the year ended December 31, 2011,
are summarized as follows (in thousands):

Combined Income and Retained Earnings

Statements for the Year Ended December 31
Par Sag

Sales $ 700 $ 500

Income from Sag 70 ----
Gain on land ---- 10
Gain on equipment 20 ----
Cost of sales (300) (300)
Depreciation expense (90) (35)
Other expenses (200) (65)
Net income 200 110
Add: Beginning retained earnings 600 200
Deduct: Dividends (100) (50)

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 Retained earnings December 31 $700 $260

Balance Sheet at December 31

Par Sag
Assets
Cash $ 35 $ 30
Accounts receivable—net 90 110
Inventories 100 80
Other current items 70 40
Land 50 70
Buildings—net 200 150
Equipment—net 500 400
Investment in Sag 655 ----
$1,700 $880

Liabilities and Stockholders’ Equity

Accounts payable $ 160 $ 50
Other liabilities 340 70
Capital stock, $10 par 500 500
Retained earnings 700 260
$1,700 $880

During 2011, Par made sales of $50,000 to Sag at a gross profit of $15,000. One-third
of these sales were inventoried by Sag at year-end. Sag owed Par $10,000 on open
account at December 31, 2011.

Sag sold land that cost $20,000 to Par for $30,000 on July 1, 2011. Par still owns the
land. On January 1, 2011, Par sold equipment with a book value of $20,000 and a
remaining useful life of four years to Sag for $40,000. Sag uses straight-line depreciation
and assumes no salvage value on this equipment.

Investment cost $630,000

Implied fair value of Sag ($630,000 / .90) 700,000

Less: Book value of Sag ($500,000 + $200,000) 700,000
Excess of Fair Value over Book Value -0-

Working Paper Entries

Sales of inventory to Sag $50,000 Gross Profit on Par's Books 15,000

Cost of inventory to Par $35,000 x 1/3
Gross Profit on Par's Books $15,000 Unrealized profit (П) $5,000

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To eliminate inter-company sales (a) and unrealized profits on Par’s books (b):

(a) SALES 50,000

COGS 50,000

(b) COGS 5,000

INVENTORY 5,000

Sale of land to Par 30,000

Cost of land to Sag 20,000
Gain on sale of land 10,000

To eliminate gain on inter-company sale of Land and to reduce land to Sag's Cost:

(c) GAIN ON SALE OF LAND 10,000

LAND 10,000

Sale of equipment to Sag $40,000 Gain on sale of equipment $20,000

BV of equipment on Par's books $20,000 x ¼
Gain on sale of equipment $20,000 Realization of gain/year $5,000

To eliminate inter-company gain on sale of equipment and to realize 1/4 of the gain on sale:

(d) GAIN ON SALE OF EQUIPMENT 20,000

EQUIPMENT - NET 20,000

(d) EQUIPMENT - NET 5,000

DEPRECIATION EXPENSE 5,000

(e) INCOME FROM SAG 70,000

DIVIDENDS 45,000
INVESTMENT IN SAG 25,000

(f) RETAINED EARNINGS 200,000

CAPITAL STOCK 500,000
INVESTMENT IN SAG 630,000
NONCONTROLLING INTEREST 70,000

(g) ACCOUNTS PAYABLE 10,000

ACCOUNTS RECEIVABLE 10,000

(h) NONCONTROLLING INTEREST SHARE 10,000

DIVIDENDS 5,000
NONCONTROLLING INTEREST 5,000
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 Journal Entries on Books of Par: Equity Method

To record receipt of 90% of Sag's Dividends:

CASH 45,000
INVESTMENT IN SAG 45,000

To record investment income from Sag:

INVESTMENT IN SAG 70,000

INCOME FROM SAG 70,000

Income from Sag

Par’s share of Sag net income (110,000 x .90) 99,000
Less: unrealized profits in ending inventory ( 5,000 )
Less: deferral of gain on sale of land (10,000 X .90) ( 9,000 )
Less: deferral of gain on sale of equipment ( 20,000 )
Add: recognition of ¼ of gain on equipment 5,000
70,000

INVESTMENT IN SAG Proof of Investment in Sag:

| Par’s share of Sag’s SE 684,000
| Less: Unrealized Profits – Inventory ( 5,000 )
| Less: Unrealized gain – Building ( 15,000 )
| Less: Unrealized gain – Land ( 9,000 )
| 655,000

Nonconcontolling Interest Share Income

Par’s share of Sag net income (110,000 x .10) 11,000
Less: deferral of gain on sale of land (10,000 X .10) ( 1,000 )
10,000

Noncontrolling Interest Proof of Noncontrolling Interest:

| NCI share of Sag’s SE 76,000
| Less: Unrealized gain – Land ( 1,000 )
| 75,000
|

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 Par Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2011

Adjustments and Consol.

Income Statement Par Sag 90% Eliminations Statements

Sales 700,000 500,000 a 50,000 1,150,000

Income from Sag 70,000 e 70,000
Gain on land 10,000 c 10,000
Gain on equipment 20,000 d 20,000
Cost of sales (300,000) (300,000) b 5,000 a 50,000 (555,000)
Depreciation expense (90,000) (35,000) d 5,000 (120,000)
Other expenses (200,000) (65,000) (265,000)
Consolidated Income 210,000
Noncontrolling share h 10,000 (10,000)
Par’s share income 200,000 110,000 200,000
Retained Earnings
Retained earnings —
Par 600,000 600,000
Retained earnings —
Sag 200,000 f 200,000
Par’s Share income 200,000ü 110,000ü 200,000
e 45,000
Dividends (100,000) (50,000) h 5,000 (100,000)
Retained earnings
December 31 700,000 260,000 700,000
Balance Sheet
Cash 35,000 30,000 65,000
Accounts receivable 90,000 110,000 g 10,000 190,000
Inventories 100,000 80,000 b 5,000 175,000
Other current items 70,000 40,000 110,000
Land 50,000 70,000 c 10,000 110,000

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Buildings — net 200,000 150,000 350,000
Equipment — net 500,000 400,000 d 15,000 885,000
Investment in Sag 655,000 e 25,000
f 630,000
1,700,000 880,000 1,885,000

Accounts payable 160,000 50,000 g 10,000 200,000

Other liabilities 340,000 70,000 410,000
Capital stock 500,000 500,000 f 500,000 500,000
Retained earnings 700,000ü 260,000ü 700,000
1,700,000 880,000

Noncontrolling interest January 1 f 70,000

Noncontrolling interest December 31 h 5,000 75,000
1,885,000

Exercise 6-3 Beams, Anthony, Bettinghaus, & Smith, Advanced Accounting, 12th ed.

Computations for downstream and upstream Sales of Land

Sir Corporation is a 90 percent-owned subsidiary of Pit Corporation. , acquired several years ago
at book value equal to fair value. For 2011 and 2012, Pit and Sir report the following:

2011 2012
Pit’s separate income (excludes Income from Sir) $150,000 $200,000
Sir’s Net Income 40,000 30,000

The only intercompany transaction between Pit and Sir during 2011 and 2012 was the
January 1, 2011, sale of land. The land had a book value of $10,000 and was sold intercompany
for $15,000, its appraised value at the time of sale.

Note: We will skip part 1 --- see Homework Solutions from Beam’s textbook.

2 Assume that the Land was sold by Sir to Pit and Pit still holds the land at December 31, 2012.
.
a. Calculate controlling share of consolidated net income for 2011 and 2012.
b. Calculate noncontrolling interest share for 2011 and 2012.

2. UPSTREAM SALE Part (a)

Consolidated Net Income Gain on NCI Share Income SIR Net

2011 Land 2011 Income
150,000 (P) 5,000 4,000 40,000
Gain 5,000 40,000 (S) x .10 500 x .10
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 185,000 500 3,500 4,000

Consolidated W/P Entry

2011 Gain on Sale of Land 5,000

Land 5,000

2011
Consolidated Net Income 185,000
Less: Noncontrolling Interest Share (3,500)
Pits Share of Net Income 181,500

2. UPSTREAM SALE Part (b)

Consolidated Net Income NCI Share Income SIR Net

2012 2012 Income
200,000 (P) 3,000 30,000
30,000 (S) x .10
230,000 3,000 3,000

Consolidated W/P Entry

2012 Investment in Sir (5,000 x .90) 4,500

Noncontrolling Interest (5,000 x .10) 500
Land 5,000
2012
Consolidated Net Income 230,000
Less: Noncontrolling Interest Share (3,000)
Pits Share of Net Income 227,000

3 Assume that the Land was sold by Sir to Pit, and that Pit sells the land to Lad (an outside
. party), for $18,000 during 2012. Pit’s separate income (excluding income from Sir) for 2012
is now $203,000 (200,000 + 3,000 gain on sale of land).
a. Calculate controlling share of consolidated net income for 2011 and 2012.
b. Calculate noncontrolling interest share for 2011 and 2012.

3. UPSTREAM SALE Part (a)

Consolidated Net Income Gain on NCI Share Income SIR Net

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 2011 Land 2011 Income
150,000 (P) 5,000 4,000 40,000
Gain 5,000 40,000 (S) x .10 500 x .10
185,000 500 3,500 4,000

Consolidated W/P Entry

2011 Gain on Sale of Land 5,000

Land 5,000

2011
Consolidated Net Income 185,000
Less: Noncontrolling Interest Share (3,500)
Pits Share of Net Income 181,500

3. UPSTREAM SALE Part (b)

Consolidated Net Income Deferred NCI Share Income SIR Net

2012 Gain on 2012 Income
203,000 (P) Land 3,000 30,000
30,000 (S) 5,000 500 x .10
5,000 Gain x .10 3,500 3,000
238,000 500

Consolidated W/P Entries`

2012 Investment in Sir (5,000 x .90) 4,500

Noncontrolling Interest (5,000 x .10) 500
Land

Land 5,000
Gain on Sale of Land 5,000

2012 2012
Consolidated Net Income 238,000 Pit’s separate Income 203,000
Less: Noncontrolling Interest Share (3,500) Add: Income from Sir 31,500
Pits Share of Net Income 234,500 Pit’s Net Income 234,500

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 Pit Corporation and Subsidiary
Consolidation Working Papers
for the year ended December 31, 2012

Adjustments and Consol.

Pit Sir 90% Eliminations Statements
Income Statement
Gain on land 3,000 5,000 (b) 8,000

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Income from Sir 31,500 31,500 (c) -0-
Consolidated Income 238,000
Less: NCI Share 3,500 (d) (3,500)
Pits Share of Income 234,500 30,000 234,500

Balance Sheet
Investment in Sir xxx 4,500 (a) 31,500 (c) -0-
Land xxx xxx 5,000 (b) 5,000 (a) xxx
NCI 500 (a) 3,500 (d) xxx

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