ADVANCED ACCOUNTING

INTERCOMPANY TRANSACTIONS- PLANT ASSETS

1. Kestrel Company acquired an 80% interest in Reptile Corporation on January 1, 2004.

2 On January 1, 2005, Reptile sold a building with a book value of $50,000 to Kestrel
for $80,000. The building had a remaining useful life of ten years and no salvage
value. The separate balance sheets of Kestrel and Reptile on December 31, 2005
included the following balances:

Kestrel Reptile
Buildings $ 400,000 $ 250,000
Accumulated Depreciation - 120,000 75,000
Buildings

The consolidated amounts for Buildings and Accumulated Depreciation - Buildings

that appeared, respectively, on the balance sheet at December 31, 2005, were

a. $620,000 and $192,000.

b. $620,000 and $195,000.
c. $650,000 and $192,000.
d. $650,000 and $195,000.

ANSWER:
Combined building amounts $ 650,000
Less: Intercompany gain ( 30,000 )
Consolidated building amounts $ 620,000

Combined Accumulated Depreciation $ 195,000

Less: Piecemeal recognition of gain
( 3,000 )
Consolidated accumulated depreciation
$ 192,000
 2. Pied Imperial-Pigeon Corporation acquired a 90% interest in Offshore Corporation in
2 2003 when Offshore’ book values were equivalent to fair values. Offshore sold
equipment with a book value of $80,000 to Pied Imperial-Pigeon for $130,000 on
January 1, 2005. Pied Imperial-Pigeon is fully depreciating the equipment over a 4-
year period by using the straight-line method. Offshore’ reported net income for 2005
was $320,000. Pied Imperial-Pigeon’s 2005 net income from Offshore was

a. $249,250.
b. $250,500.
c. $254,250.
d. $288,000.

ANSWER:
Pied Imperial-Pigeon’s share of Roger’s
income = ($320,000 x 90%) = $ 288,000
Less: Profit on intercompany sale ($130,000 -
$80,000) x 90% = ( 45,000
Add: Piecemeal recognition of deferred profit
($50,000/4 years) x 90% =
11,250
Income from Offshore $ 254,250

3. On January 1, 2016. Poe Corporation sold machine for 900,000 to Saxe Corp. its wholly
owned subsidiary. Poe paid 1,100,000 for this machine, which had accumulated
depreciation of 250,000 . Poe estimated of 100,000 salvage value and depreciated the
machine on the straight line method over 20 years, a policy which Saxe continued, In
Poe’s December 31, 2016, consolidated balance sheet, this machine should be included in
cost and accumulated depreciation as:

COST ACCUMULATED DEPRECIATION

a. 1,100,000 300,000
b. 1,100,000 290,000
c. 900,000 40,000
d. 850,000 42,500

ANS: A

When preparing consolidated financial statements, the objective is to restate the accounts as if
the intercompany transactions had not occurred. Therefore, the 2016 gain on sale of machine of
50,000 (900,000-(1,100,000-250,000) must be eliminated, since the consolidated entity has not
realized any gain. In effect, the machine must be reflected on the consolidated balance sheet at
1/1/2016 at Poe’s cost of 1,100,000 and accumulated depreciation of 250,000 instead of at a new
“cost” of 900,000.For consolidated statement purposes, 2016 depreciation is based on the
original amounts (1,100,000-100,000) X 1/20= 50,000).

Therefore, in the 12/31/2016 consolidated balance sheet, the machine is shown at a cost of
1,100,000 less accumulated depreciation of 300,000 (250,000+50,000).