Sale in Subsequent Year to Outside Entity

Assume that Pak uses the land for four years and sells it for $65,000 in 2015. In the year of sale, Pak
will report a $15,000 gain ($65,000 proceeds less $50,000 cost), but the gain to the consoli-dated
entity is $25,000, allocated $24,000 [$15,000 + ($10,000 × 0.9)] to controlling stockholders and
$1,000 to noncontrolling stockholders. Pak adjusts its investment income from San in 2015 with the
following entry: Investment in San (+A) 9,000 Income from San (R, +SE) 9,000
To recognize previously deferred intercompany profits on land. The $15,000 gain on the sale of land
plus the $9,000 increase in investment income on Pak’s books equals the $24,000 effect on
consolidated net income in 2015. In the consolidation workpaper, the adjustment of the $15,000
gain of Pak to the $25,000 con-solidated gain requires the following entry:

Investment in San (+A) 9,000

Noncontrolling interest (- SE) 1,000

Gain on land (Ga, +SE) 10,000

To adjust gain on land to the $25,000 gain to the consolidated entity. This entry allocates the
$10,000 gain between the Investment in San (90%) and noncontrolling interest (10%).

INTERCOMPANY PROFITS ON DEPRECIABLE PLANT ASSETS

The accounts of the selling affiliate reflect intercompany sales of plant assets subject to
depreciation, depletion, or amortization that result in unrealized gains or losses. Firms must
eliminate the effects of these gains and losses from parent and consolidated financial statements
until the consolidated entity realizes them through sale to other entities or through use within the
consolidated entity . The adjustments to eliminate the effects of unrealized gains and losses on
parent and consolidated financial statements are more complex than in the case of nondepreci-able
assets. This additional complexity stems from the depreciation (or depletion or amortiza-tion)
process that affects parent and consolidated income in each year in which the related assets are
held by affiliates. The discussion of intercompany sales of plant assets in this section is limited
to depreciable assets, but the analysis and procedures illustrated apply equally to assets subject to
depletion or amortization. Intercompany gains and losses from downstream sales of depreciable
plant assets are considered initially, and the upstream-sale situation is covered next.

Downstream Sales of Depreciable Plant Assets The initial effect of unrealized gains and losses from
downstream sales of depreciable assets is the same as for nondepreciable assets. Gains or losses
appear in the parent’s accounts in the year of sale and must be eliminated by the parent in
determining its investment income under the equity method. Similarly, we eliminate such gains or
losses from consolidated statements by removing each gain or loss and reducing the plant assets to
their depreciated cost to the consoli-dated entity.