Upstream Sales of Depreciable Plant Assets

Upstream sales of depreciable assets from a subsidiary to a parent result in unrealized gains or

losses in the subsidiary accounts in the year of sale (unless the assets are sold at book values). In

computing its investment income in the year of sale, the parent adjusts its share of the reported

income of the subsidiary for (1) its share of any unrealized gain on the sale and (2) its share of any

piecemeal recognition of such unrealized gain through depreciation.

Effect of Upstream Sale

The effect of a gain on an upstream sale

is illustrated by the following example. Pru Corporation purchases a truck from its 80 percent-

owned subsidiary, Sot Corporation, on January 1, 2011. Other information is as follows:

The deferral of the intercompany gain on the truck decreases Pru’s investment income for 2011

by $1,600 (from $40,000 to $38,400). This is 80 percent of the unrealized gain at December 31,

2011 [($3,000 unrealized gain from sale – $1000 piecemeal recognition through depreciation)

*80%]. Pru will recognize the remaining $1,600 during 2012 and 2013 at the rate of $800 per year.