TheAdvanced Accounting Homework Week 6

Questions
1. What is the objective of eliminating the effects of intercompany sales of plant assets in preparing consolidated
financial statements?
To bring the plant assets and depreciation accounts to cost on the consolidated statement.
2. In accounting for unrealized profits and losses from intercompany sales of plant assets, does it make any
difference if the parent is the purchased or the seller? Would your answer be different if the subsidiary were 100
percent owned?

The full amount of unrealized profit is charged or credited to the controlling interest. In upstream sales, unrealized
profit and loss is between controlling and noncontrolling interest. When it comes to a 100 percent-owned subsidiary
there is no allocation to noncontrolling interest.

3. When are unrealized gains and losses from intercompany sales of land realized from the viewpoint of the
selling affiliate?
This is done when the land is resold to outside parties.
4. How is the computation of noncontrolling interest share affected by downstream sales of land? By upstream
sales of land?

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Noncontrolling interest is not affected by downstream sales. In upstream sales the unrealized profit is decreased and

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the unrealized loss is increased. The only transaction that would be affected with noncontrolling interest would be an

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upstream sale.

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5. Consolidation workpaper entries are made to eliminate 100 percent of the unrealized profit from the land
account in downstream sales of land. Is 100 percent also eliminated for upstream sales of land?

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The amount would be between controlling and noncontrolling interest.
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6. How are unrealized gains and losses from intercompany transactions involving depreciable assets eventually
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realized?
They are realized through the use of assets held within the consolidation entity and through the sale of the assets
sold to outside parties.
7. Describe the computation of noncontrolling interest share in the year of an upstream sale of depreciable plant
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assets.
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Unrealize Unrealized
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d Gain on Loss on
sale Sale
Income of subsidiary as reported 000 000
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Deduct: Gain on sale of plant assets -00

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Add: Loss on sale of plant assets + 00

Add: Piecemeal recognition of gain on sale of plant assets +0
Deduct: Piecemeal recognition of loss on sale of plant assets -0
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Realized subsidiary income 000

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Noncontrolling interest percentage 0% 0%

Noncontrolling interest share 000 000

8. How does a parent eliminate the effects of unrealized gains on intercompany sales of plant assets under the
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equity method?
Unrealized gains on intercompany sales of plant assets are charged against the parent’s income from subsidiary
account in the year of the intercompany sale, with equal amounts being deducted from the investment in subsidiary
account.
9. What is the effect of intercompany sales of plant assets on parent and consolidated net income in years
subsequent to the year of sale?

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 On intercompany sales of plant assets on parent and consolidated income in years subsequent to the year of sale, you
eliminate by adjusting the depreciation expense for the parent company to a cost basis for the consolidated.
10. Explain the sequences of workpaper adjustments and eliminations for unrealized gains and losses on
depreciable plant assets. Is you answer affected by whether the intercompany transaction occurred in the
current year or in prior years?
In the year of the sale:
Debit: Gain on sale
Debit: Accumulated depreciation
Credit: Depreciation expense
Credit: Plant assets
This is to reduce plant assets and depreciation amounts to cost basis to consolidate and to eliminate unrealized
gain on intercompany sales.

In the subsequent years:

Debit: Investment in Subsidiary

Debit: Accumulated depreciation
Credit: Depreciation expense
Credit: Plant assets

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This is to reduce plant assets and depreciation amounts to cost basis to consolidate and to eliminate unrealized gain
on intercompany sales at the beginning of the current year.

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E 6-1 General Questions
Use the following information in answering questions 1 and 2:

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Par Company sells land with a book value of $5,000 to Sub Company for $6,000 in 2011. Sub Company holds the
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land during 2012. Sub Company sells the land for $8,000 to an outside entity in 2013.
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1. In 2011 the unrealized gain:
a. To be eliminated is affected by the noncontrolling interest percentage.
b. Is initially included in the subsidiary’s accounts and must be eliminated from Par Company’s income from
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Sub Company under the equity method.

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c. Is eliminated from consolidated net income by a workpaper entry that includes a credit to land
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account for $1,000.

d. Is eliminated from consolidated net income by a workpaper entry that includes a credit to land account for
$5,000
2. Which of the following statements is true?
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a. Under the equity method, Par Company’s investment in Sub account will be $1,000 less than
its underlying equity in Sub throughout 2012.
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b. No workpaper adjustments for the land are required in 2012 if Par Company has applied the equity
method correctly.
c. A workpaper entry debiting gain on sale of land and crediting land will be required each year until
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the land is sold outside the consolidated entity

d. In 2013, the year Sub’s sale to an outside entity, the workpaper adjustment for the land will
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include a debit to gain on sale of land for $2,000.

Use the following information in answering questions 3 and 4:
Pen Corporation sold machinery to its 80 percent-owned subsidiary, Sam Corporation, for $100,000 on December
31, 2011. The cost of the machinery to Pen was $80,000, the book value at the time of sale was $60,000, and the
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machinery had a remaining useful life of five years.

3. How will the intercompany sale affect Pen’s income from Sam and Pen’s net income for 2011?
Pen's Income
from Sam Pen's Net Income
a No effect No effect
b Increased No effect

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 c Decreased No effect
d No effect Decreased

4. How will the consolidated assets and consolidated net income for 2011 be affected by the intercompany
sale?
Consolidate
Consolidated d Net
Net Assets Income
a No effect Decreased
b Decreased Decreased
c Increased No effect
d No effect No effect

E6-6 General Problems

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1. Son Corporation is an 80 percent-owned subsidiary of Pin Corporation. In 2011. Son sold land that costs

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$15,000 to Pin for $25,000. Pin held the land for eight years before reselling it in 2019 to Roy Company, an

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unrelated entity, for $55,000. The 2019 consolidated income statement for Pin and its subsidiary, Son, will show

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a gain in the sale of land of:
a. $40,000

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b. $32,000
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c. $30,000
d. $24,000
2. On January 3, 2011, Pal Corporation sells equipment with a book value of $90,000 to its 100 percent-
owned subsidiary, Sat Corporation, for $120,000. The equipment has a remaining useful life of three years with
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no salvage at the time of transfer. Sat uses the straight-line method of depreciation. As a result of this
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intercompany transaction, Pal’s investment in Sat account balance at December 31, 2011, will be:
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a. $20,000 greater than its underlying equity interest

b. $20,000 less than its underlying equity interest
c. $30,000 less than its underlying equity interest
d. $10,000 greater than its underlying equity interest
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3. Pen Corporation sells equity with a book value of $80,000 to Sir Company, its 75 percent-owned
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subsidiary, for $100,000 on January 1, 2011. Sir determines that the remaining useful life of the equipment is
four years and that straight-line depreciation is appropriate. The December 31, 2011, separate financial
statements of Pen and Sir show equipment—net of $500,000 and $300,000, respectively. Consolidated
equipment—net will be:
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a. $800,000
b. $785,000
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c. $780,000
d. $650,000
4. Par Corporation sold equipment with a remaining three-year useful life and a book value of $14,500 to its
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80 percent-owned subsidiary, Sad Corporation, for $16,000 on January 2, 2011. A consolidated workpaper entry
on December 31, 2011, to eliminate the unrealized profits from the intercompany sale of equipment will
include:
a. A debit to gain on sale of equipment for $1,000
b. A debit to gain on sale of equipment for $1,500
c. A credit to depreciation expense for $1,500
d. A debit to machinery for $1,500

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 5. A subsidiary sells equipment with a four-year remaining useful life to its parent at a $12,000 gain on
January 1, 2011. The effect of this intercompany transaction on the parent’s investment income from its
subsidiary for 2011 will be:
a. An increase of $12,000 if the subsidiary is 100% owned
b. An increase of $9,000 if the subsidiary is 100% owned
c. A decrease of $9,000 if the subsidiary is 100% owned
d. A decrease of $3,600 if the subsidiary is 60% owned
6. On January 1, 2011, Sin Corporation, a 60 percent-owned subsidiary of Pot Company, sells a building with
a book value of $300,000 to its parent for $350,000. At the time of sale, the building has an estimated remaining
life of 10 years with no salvage value. Pot uses straight-line depreciation. If Sin reports net income of
$1,000,000 for 2011, noncontrolling interest share will be:
a. $450,000
b. $400,000
c. $382,000
d. $355,000
E 6-10 Inventory items of parent capitalized by subsidiary
Ped Industries manufactures heavy equipment used in construction and excavation. On January 3, 2011, Ped sold a

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piece of equipment from its inventory that cost $180,000 to its 60 percent-owned subsidiary, Spa Corporation, at

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Ped’s standard price of twice its cost. Spa is depreciating the equipment over six years using straight-line

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depreciation and no salvage value.

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REQUIRED:
1. Determine the net amount at which this equipment will be included in the consolidated balance sheets for Ped

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Industries and Subsidiary at December 31, 2011 and 2012.
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2. Ped accounts its investment in Spa as a one-line consolidation. Prepare the consolidation workpaper entries
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related to this intercompany sale that are necessary to consolidate the financial statements of Ped and Spa at
December 31, 2011 and 2012.
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ANSWER:
1.
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Consolidated balance sheet:

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2011
Equipment (at transfer price) 360,000
Unrealized profit (180,000)
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Depreciation by Spa (60,000)

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Depreciation on unrealized profit 30,000

Equipment--net for consolidated balance sheet 150,000
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2012
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Equipment-- net beginning 150,000

depreciation (30,000)
Equipment-- net 120,000
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2.
Consolidated workpaper entries
2011
Sales 360,000

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 Cost of goods sold 180,000
Equipment-net 150,000
Depreciation expense 30,000
To eliminate intercompany sale, return equipment
to cost to consolidate entity and eliminate
depreciation on intercompany profit

2012
Investment in Spa 150,000
Equipment-net 120,000
Depreciation expense 30,000
To eliminate unrealized profit from equipment account
and current year depreciation on the unrealized

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profit and to balance the investment account and

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beginning of the period subsidiary equity account

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