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Chapter

7-1

77
Elimination of Unrealized
Gains or Losses on
Intercompany Sales of
Property and Equipment

Advanced Accounting, Third Edition


Chapter
7-2

Learning
Learning Objectives
Objectives
1.

Understand the financial reporting objectives in accounting


for intercompany sales of nondepreciable assets on the
consolidated financial statements.

2.

Explain the additional financial reporting objectives in


accounting for intercompany sales of depreciable assets on the
consolidated financial statements.

3.

Explain when gains or losses on intercompany sales of


depreciable assets should be recognized on a consolidated
basis.

4.

Explain the term realized through usage.

5.

Describe the differences between upstream and downstream


sales in determining consolidated net income and the
controlling and noncontrolling interests in consolidated income.

Chapter
7-3

Learning
Learning Objectives
Objectives
6.

Compare the eliminating entries when the selling affiliate is a


subsidiary (less than wholly owned) versus when the selling
affiliate is the parent company.

7.

Compute the noncontrolling interest in consolidated net income


when the selling affiliate is a subsidiary.

8.

Compute consolidated net income considering the effects of


intercompany sales of depreciable assets.

9.

Describe the eliminating entry needed to adjust the


consolidated financial statements when the purchasing
affiliate sells a depreciable asset that was acquired from
another affiliate.

10.

Explain the basic principles used to record or eliminate


intercompany interest, rent, and service fees.

Chapter
7-4

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
When there have been intercompany sales of nondepreciable
property, workpaper entries are necessary to:
Include gains or losses on the sale in consolidated net
income only at the time such property is sold to
parties outside the affiliated group and in an amount
equal to the difference between the cost of the
property to the affiliated group and the proceeds
received from outsiders.
Present nondepreciable property in the consolidated
balance sheet at its cost to the affiliated group.
Chapter
7-5

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
Upstream Sale

E7-4 (variation) Procter Company owns 90% of the


outstanding stock of Silex Company. On January 1, 2008,
Silex Company sold land to Procter Company for
$350,000. Silex had originally purchased the land on June
30, 2004, for $200,000.
Procter Company plans to construct a building on the land
bought from Silex in which it will house new production
machinery. The estimated useful life of the building and
the new machinery is 15 years.
Chapter
7-6

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-4 (variation) Entries made on the books of each affiliate
to record this intercompany sale in 2008.
Entry on Books of Silex
Cash
Land
Gain on sale

350,000

Entry on Books of Procter


Land

200,000

350,000

Cash

350,000

150,000
Additional Entry for Complete
Equity Method: Proctor Only

Note: No further entries are


recorded on the books of Procter
until the land is sold to outsiders.

Chapter
7-7

Equity in income

135,000

Investment in Silex

135,000

To reduce its income from subsidiary


by its share of the intercompany gain
($150,000 x 90%).

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-4 B(1). Prepare the workpaper entries necessary because
of the intercompany sale of land for the year ended
December 31, 2008.
Gain on Sale of Land
Land ($350,000 - $200,000)

150,000
150,000

To eliminate the $150,000 gain reported by Silex Company and to


reduce the land balance from the $350,000 recorded on the books
of Procter to its $200,000 cost to the affiliated group.

Chapter
7-8

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-4 B(2). Prepare the workpaper entries for the year
ended December 31, 2009.

Upstream Sale

Cost Method and Partial Equity Method


Beg. Retained Earnings Procter (90%)
Noncontrolling Interest (10%)

135,000
15,000

Land

150,000

Complete Equity Method


Investment in Silex Company (90%)
Noncontrolling Interest (10%)
Land

Chapter
7-9

135,000
15,000
150,000

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-4 Summary Points
1.

Proctor (parent) continues to report the land on their


statements at the intercompany selling price of
$350,000. However, in the consolidated balance sheet,
the land is reported at its cost to the affiliated group of
$200,000.

2.

If the intercompany seller had been the parent


(downstream sale), the entire $150,000 would go to the
controlling interest, resulting in a $150,000 debit to the
beginning retained earnings of the parent company.

Chapter
7-10

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
Sales to Outsiders
E7-6 P Company owns 90% of the outstanding common stock of
S Company. On January 1, 2008, S Company sold land to P
Company for $600,000. S Company originally purchased the
land for $400,000.
On January 1, 2009, P Company sold the land purchased
from S Company to a company outside the affiliated group
for $700,000.
Required:
A. Calculate the amount of gain on the sale of the land that is
recognized on the books of P Company in 2009.
Chapter
7-11

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-6 A. Calculate the gain on the sale of the land that is
recognized on the books of P Company in 2009.

Selling price to third party


Cost of land to P Company
Gain recognized by P Company

$ 700,000
600,000
$ 100,000

B. Calculate the gain that should be recognized


in the consolidated statements in 2009.

Selling price to third party


Cost of land to affiliate group
Gain recognized in consolidation
Chapter
7-12

$ 700,000
400,000
$ 300,000

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-6 C. Prepare the workpaper entries for the year ended
December 31, 2009.
Cost Method and Partial Equity Method
Beg. Retained Earnings Procter (90%)
Noncontrolling Interest (10%)

180,000
20,000

Gain on Sale of Land

200,000 *

Complete Equity Method


Investment in Silex Company (90%)
Noncontrolling Interest (10%)
Gain on Sale of Land

180,000
20,000
200,000 *

* Gain recognized in consolidation less gain recognized by P Company


($300,000 - $100,000 = $200,000).
Chapter
7-13

LO 1 Financial reporting objectives nondepreciable property.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
(Machinery,
(Machinery, Equipment,
Equipment, and
and Buildings)
Buildings)
Realization through Usage
A firm may sell property or equipment to an affiliate for a
price that differs from its book value.
From the view of the consolidated entity, the intercompany
gain (loss) is considered to be realized from the use of the
property or equipment in the generation of revenue. The use
is measured by depreciation adjustments.

Chapter
7-14

LO 4 Intercompany gain realized through usage.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
(Machinery,
(Machinery, Equipment,
Equipment, and
and Buildings)
Buildings)
When there have been intercompany sales of depreciable
property, workpaper entries are necessary:

To report only those gains or losses that result from the


sale of depreciable property to outside parties.

To present property in the consolidated balance sheet at


its cost to the affiliated group.

To present accumulated depreciation in the consolidated


balance sheet based on the cost to the affiliated group.

To present depreciation expense in the consolidated


income statement based on the cost to the affiliated
group.

Chapter
7-15

LO 2 Financial reporting objectives depreciable property.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
(Machinery,
(Machinery, Equipment,
Equipment, and
and Buildings)
Buildings)
Workpaper Elimination Entries
A firm may sell property or equipment to an affiliate for a
price that differs from its book value.
From the view of the consolidated entity, the intercompany
gain (loss) is considered to be realized from the use of the
property or equipment in the generation of revenue.

Chapter
7-16

LO 2 Financial reporting objectives depreciable property.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Upstream Sale
P7-1 (Cost or Partial Equity) Powell Company owns 80% of the
outstanding common stock of Sullivan Company. On June 30, 2008,
Sullivan Company sold equipment to Powell Company for $500,000.
The equipment cost Sullivan Company $780,000 and had
accumulated depreciation of $400,000 on the date of the sale.
The management of Powell Company estimated that the equipment
had a remaining useful life of four years from June 30, 2008. In
2009, Powell Company reported $300,000 and Sullivan Company
reported $200,000 in net income from their independent
operations (including sales to affiliates but excluding dividend or
equity income from subsidiary).
Chapter
7-17

LO 6 Subsidiary vs. parent as the seller.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 Entries on the books of Powell and Sullivan to record the
intercompany sale are:
Powell Company
Equipment
Cash

500,000

500,000

Sullivan Company
Cash
Accumulated Depreciation
Equipment
Gain on Sale of Equipment
Chapter
7-18

500,000
400,000

780,000
120,000

LO 6 Subsidiary vs. parent as the seller.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2008.

2008
Original Cost
Selling Price
Difference

$
$

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)

Equipment

280,000

Gain on Sale of Equipment

120,000

Accumulated Depreciation

400,000

To eliminate the intercompany gain and restore equipment to its


original cost to the consolidated entity.
Chapter
7-19

LO 6 Subsidiary vs. parent as the seller.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2008.

2008
Original Cost
Selling Price
Difference

$
$

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)

Accumulated Depreciation - Equipment


Depreciation Expense ($30,000/2)

15,000
15,000

To adjust depreciation expense to the correct amount to the


consolidated entity, thus realizing a portion of the gain through
usage.
Chapter
7-20

LO 6 Subsidiary vs. parent as the seller.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2009.

2009
Original Cost
Selling Price
Difference

$
$

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)

Equipment (to original cost)

280,000

Beg. Retained Earnings - Powell ($120,000 x80%)

96,000

Noncontrolling Interest ($120,000 x 20%)

24,000

Accumulated Depreciation - Equipment

400,000

To eliminate prior period intercompany gain and restore equipment to its


original cost to the consolidated entity.

Chapter
7-21

LO 7 Computing the noncontrolling interest.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 A. Prepare the workpaper entries necessary because of
the sale of equipment for the year ended December 31, 2009.

2009
Original Cost
Selling Price
Difference

$
$

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
780,000 $ 400,000 $
380,000 4 yr $ 95,000
500,000
500,000 4 yr
125,000
280,000 $ 400,000 $ (120,000)
$ (30,000)

Accumulated Depreciation - Equipment

45,000

Depreciation Expense ($120,000/4)

30,000

Beg. Retained Earnings Powell ($15,000 x 80%)

12,000

Noncontrolling Interest ($15,000 x 20%)

3,000

To adjust depreciation for the current and prior year on equipment sold to
affiliate.

Chapter
7-22

LO 7 Computing the noncontrolling interest.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 (variation) For the Compete Equity Method, the 2009
workpaper entries would have changed as follows:
Equipment (to original cost)

280,000

Investment in Sullivan ($120,000 x80%)

96,000

Noncontrolling Interest ($120,000 x 20%)

24,000

Accumulated Depreciation - Equipment


Accumulated Depreciation - Equipment

Chapter
7-23

400,000
45,000

Depreciation Expense ($120,000/4)

30,000

Investment in Sullivan ($15,000 x 80%)

12,000

Noncontrolling Interest ($15,000 x 20%)

3,000

LO 7 Computing the noncontrolling interest.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-1 (variation) If this had been a Downstream sale, the
2009 entries would have changed as follows:
Cost or Partial Equity
Noncontrolling interest of 20% would be included in
Beginning Retained Earnings of Powell Company.
Complete Equity Method
Noncontrolling interest of 20% would be included in
Investment in Sullivan.
There is no differentiation between Controlling interest and
Noncontrolling interest with Downstream Intercompany Sales.
Chapter
7-24

LO 7 Computing the noncontrolling interest.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Year Subsequent to Intercompany Sale

Upstream Sale

P7-6 (Cost Method) Pitts Company owns 80% of the common


stock of Shannon Company. The stock was purchased for
$960,000 on January 1, 2006, when Shannon Companys retained
earnings were $675,000. On January 1, 2008, Shannon Company
sold fixed assets to Pitts Company for $960,000; Shannon
Company had purchased these assets for $1,350,000 on January
1, 1998, at which time their estimated useful life was 25 years.
The estimated remaining useful life to Pitts Company on 1/1/08 is
10 years. Both companies employ the straight-line method of
depreciation.
Required: A. Prepare a consolidated statements workpaper for
the year ended December 31, 2009.
Chapter
7-25

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-6 (Cost Method)
Income Statement
Sales
Dividend income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income
Retained Earnings Statement
Retained earnings, 1/1
Pitts
Shannon
Net income
Dividends declared
Retained earnings, 12/31

Pitts
$ 1,950,000
60,000
2,010,000
1,350,000
225,000
1,575,000
435,000
$

435,000

Eliminations
Debit
Credit

Shannon
$ 1,350,000

NCI

60,000 (4)
1,350,000
900,000
150,000
1,050,000
300,000
$

300,000

15,000

60,000

15,000

120,000 (2) 290,400


12,000
1,038,000
1,038,000 (5)
435,000
300,000
60,000
15,000
(150,000)
(75,000)
60,000
$ 1,500,000 $ 1,263,000 $ 1,218,000 $ 377,400
1,215,000

(3)

63,000
$ 63,000

Consolidated
Balances
$
3,300,000
3,300,000
2,250,000
360,000
2,610,000
690,000
(63,000)
$
627,000

(1)

1,397,400

(3)

63,000
(15,000)
$ 48,000 $

(4)

627,000
(150,000)
1,874,400

NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000


Chapter
7-26

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-6 (Cost Method)
Balance Sheet
Inventory
Investment in S
Fixed assets
Accum. Depreciation
Total assets
Liabilities
Common stock
Retained earnings
NCI in net assets

$
$

Total liab. & equity $

Chapter
7-27

Eliminations
Debit
Credit

Pitts
Shannon
498,000 $
225,000
960,000
2,168,100
2,625,000
(900,000)
(612,000)
2,726,100 $ 2,238,000
465,600
760,500
1,500,000

2,726,100

450,000
525,000
1,263,000

2,238,000

290,400
390,000
30,000

(1)

525,000
1,218,000
30,000

(5)

2,483,400

NCI

1,250,400

(5)

540,000

(2)

(2)
(3)

(2)

377,400
312,600
3,000

$ 2,483,400

(5)
(3)

48,000
285,600

Consolidated
Balances
$
723,000
5,183,100
(2,022,000)
$
3,884,100
$
915,600
760,500
1,874,400
-

333,600
$

333,600
3,884,100

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-6 Prepare the worksheet entries for Dec. 31, 2009.
Acquisition date retained earnings - Shannon $ 675,000
Retained earnings 1/1/09 - Shannon
1,038,000
Increase
363,000
Ownership percentage
80%
$ 290,400
1. Investment in Shannon Company

290,400

Retained Earnings Pitts


290,400
To establish reciprocity/convert to equity
Chapter
7-28

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-6 Prepare the worksheet entries for Dec. 31, 2009.

Original Cost
Selling Price
Difference

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)

2. Plant and Equipment

390,000

Retained Earnings Pitts ($150,000 x 80%)

120,000

Noncontrolling Interest ($150,000 x 20%)

30,000

Accumulated Depreciation

540,000

To reduce controlling and noncontrolling interests for their shares of


unrealized intercompany profit at beg. of year, to restore fixed assets to
its book value to the selling affiliate on the date of the intercompany sale
Chapter
7-29

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-6 Prepare the worksheet entries for Dec. 31, 2009.

Original Cost
Selling Price
Difference

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)

3. Accumulated Depreciation

30,000

Other Expenses (Depreciation Expense)

15,000

Retained Earnings Pitts ($15,000 x 80%)

12,000

Noncontrolling Interest ($15,000 x 20%)

3,000

To reverse amount of excess depreciation recorded during year and to


recognize an equivalent amount of intercompany profit as realized
Chapter
7-30

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-6 Prepare the worksheet entries for Dec. 31, 2009.
4. Dividend Income

60,000

Dividends Declared

60,000

To eliminate intercompany dividends

5. Beg. Retained Earnings - Shannon


Common Stock - Shannon

1,038,000
525,000

Investment in Shannon

1,250,400

Noncontrolling Interest

312,600

To eliminate investment account and create NCI account


Chapter
7-31

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Year Subsequent to Intercompany Sale

Upstream Sale

P7-12 (Partial Equity Method) Prather Company owns 80% of


the common stock of Stone Company. The stock was purchased
for $960,000 on January 1, 2006, when Stone Companys retained
earnings were $675,000. On January 1, 2008, Stone Company sold
fixed assets to Prather Company for $960,000; Stone Company
had purchased these assets for $1,350,000 on January 1, 1998, at
which time their estimated useful life was 25 years. The
estimated remaining useful life to Prather Company on 1/1/08 is
10 years. Both companies employ the straight-line method of
depreciation.
Required: A. Prepare a consolidated statements workpaper for
the year ended December 31, 2009.
Chapter
7-32

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-12 (Partial Equity Method)
Income Statement
Sales
Equity in Sub. income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income

Prather
$ 1,950,000
240,000
2,190,000
1,350,000
225,000
1,575,000
615,000
$

615,000

Eliminations
Debit
Credit

Stone
$ 1,350,000

240,000

(1)

1,350,000
900,000
150,000
1,050,000
300,000
$

300,000

NCI

15,000 (3)

240,000

Retained Earnings Statement


Retained earnings, 1/1
Pitts
1,505,400
120,000
Shannon
1,038,000
1,038,000
Net income
615,000
300,000
240,000
Dividends declared
(150,000)
(75,000)
Retained earnings, 12/31
$ 1,970,400 $ 1,263,000 $ 1,398,000

(2)

15,000

63,000
63,000

Consolidated
Balances
$
3,300,000
3,300,000
2,250,000
360,000
2,610,000
690,000
(63,000)
$
627,000

12,000 (3)

(4)

15,000
63,000
60,000 (1) (15,000)
87,000 $ 48,000 $

1,397,400
627,000
(150,000)
1,874,400

NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000


Chapter
7-33

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-12 (Partial Equity Method)
Balance Sheet
Inventory
Investment in Stone
Fixed assets
Accum. Depreciation
Total assets
Liabilities
Common stock
Retained earnings
NCI in net assets

Prather
$
498,000
1,430,400

$
$

Total liab. & equity $

Chapter
7-34

Stone
225,000

1,250,400
180,000

2,168,100
(900,000)
3,196,500 $

2,625,000
(612,000)
2,238,000

465,600
760,500
1,970,400

450,000
525,000
1,263,000

3,196,500

Eliminations
Debit
Credit

2,238,000

390,000
30,000

NCI
(4)

Consolidated
Balances
$
723,000
-

(1)

(2)
(3)

540,000

(2)

$
$
525,000
1,398,000
30,000

(4)

87,000
48,000
312,600 (4) 285,600
(2)
3,000 (3)
333,600
2,373,000 $ 2,373,000

5,183,100
(2,022,000)
3,884,100
915,600
760,500
1,874,400
333,600
3,884,100

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-12 Prepare the worksheet entries for Dec. 31, 2009.
1. Equity In Subsidiary Income

240,000

Dividends Declared ($75,000 x 80%)


60,000
Investment in Stone Company
180,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income

Chapter
7-35

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-12 Prepare the worksheet entries for Dec. 31, 2009.

Original Cost
Selling Price
Difference

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)

2. Plant and Equipment

390,000

Retained Earnings Prather ($150,000 x 80%)


Noncontrolling Interest ($150,000 x 20%)
Accumulated Depreciation

120,000
30,000
540,000

To reduce controlling and noncontrolling interests for their shares of


unrealized intercompany profit at beg. of year, to restore fixed assets to
its book value to the selling affiliate on the date of the intercompany sale
Chapter
7-36

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-12 Prepare the worksheet entries for Dec. 31, 2009.

Original Cost
Selling Price
Difference

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)

3. Accumulated Depreciation

30,000

Other Expenses (Depreciation Expense)

15,000

Retained Earnings Prather ($15,000 x 80%)

12,000

Noncontrolling Interest ($15,000 x 20%)

3,000

To reverse amount of excess depreciation recorded during year and to


recognize an equivalent amount of intercompany profit as realized
Chapter
7-37

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-12 Prepare the worksheet entries for Dec. 31, 2009.
4. Beg. Retained Earnings - Stone
Common Stock - Stone

1,038,000
525,000

Investment in Stone

1,250,400 *

312,600 **

Noncontrolling Interest
To eliminate investment account and create NCI account

* (($1,263,000 - $675,000) x 80%) - $180,000 = $290,400 + $960,000 =


$1,250,400
** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
Chapter
7-38

LO 6 Workpaper entries-upstream sales.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Year Subsequent to Intercompany Sale

Upstream Sale

P7-16 (Complete Equity Method) Prather Company owns 80% of


the common stock of Stone Company. The stock was purchased
for $960,000 on January 1, 2006, when Stone Companys retained
earnings were $675,000. On January 1, 2008, Stone Company sold
fixed assets to Prather Company for $960,000; Stone Company
had purchased these assets for $1,350,000 on January 1, 1998, at
which time their estimated useful life was 25 years. The
estimated remaining useful life to Prather Company on 1/1/08 is
10 years. Both companies employ the straight-line method of
depreciation.
Required: A. Prepare a consolidated statements workpaper for
the year ended December 31, 2009.
Chapter
7-39

LO 6 Upstream sales- complete equity method.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-16 (Complete Equity Method)
Income Statement
Sales
Equity in Stone income
Total revenue
Cost of goods sold
Other expenses
Total cost and expense
Net income
Noncontrolling interest
Net income

Panther
$ 1,950,000
252,000
2,202,000
1,350,000
225,000
1,575,000
627,000
$

627,000

Eliminations
Debit
Credit

Stone
$ 1,350,000

NCI

252,000 (1)
1,350,000
900,000
150,000
1,050,000
300,000
$

300,000

15,000 (3)

252,000

Retained Earnings Statement


Retained earnings, 1/1
Panther
1,397,400
Stone
1,038,000
1,038,000 (5)
Net income
627,000
300,000
252,000
Dividends declared
(150,000)
(75,000)
Retained earnings, 12/31
$ 1,874,400 $ 1,263,000 $ 1,290,000 $

15,000

63,000
63,000

Consolidated
Balances
$
3,300,000
3,300,000
2,250,000
360,000
2,610,000
690,000
(63,000)
$
627,000

15,000
63,000
60,000 (1) (15,000)
75,000 $ 48,000 $

1,397,400
627,000
(150,000)
1,874,400

NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000


Chapter
7-40

LO 6 Upstream sales- complete equity method.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-16 (Complete Equity Method)
Balance Sheet
Inventory
Investment in S

Fixed assets
Accum. Depreciation
Total assets
Liabilities
Common stock
Retained earnings
NCI in net assets

Panther
$
498,000
1,334,400

$
$

Total liab. & equity $

Chapter
7-41

Stone
225,000

120,000

2,168,100
(900,000)
3,100,500 $

2,625,000
(612,000)
2,238,000

465,600
760,500
1,874,400

450,000
525,000
1,263,000

3,100,500

Eliminations
Debit
Credit

2,238,000

390,000
30,000

(2)

(2)
(3)

NCI

192,000
12,000
1,250,400

(1)

540,000

(2)

Consolidated
Balances
$
723,000
-

(3)
(4)

$
$
525,000
1,290,000
30,000

(4)

75,000
48,000
(2)
312,600 (5) 285,600
3,000 (3)
333,600
2,385,000 $ 2,385,000

5,183,100
(2,022,000)
3,884,100
915,600
760,500
1,874,400
333,600
3,884,100

LO 6 Upstream sales- complete equity method.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-16 Prepare the worksheet entries for Dec. 31, 2009.
1. Equity in Subsidiary Income

252,000

Dividends Declared ($75,000 x 80%)


60,000
Investment in Stone Company
192,000
To reverse the effect of parent company entries during
the year for subsidiary dividends and income

Chapter
7-42

LO 6 Upstream sales- complete equity method.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-16 Prepare the worksheet entries for Dec. 31, 2009.

Original Cost
Selling Price
Difference

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)

2. Plant and Equipment

390,000

Investment in Stone ($150,000 x 80%)


Noncontrolling Interest ($150,000 x 20%)
Accumulated Depreciation

120,000
30,000
540,000

To reduce controlling and noncontrolling interests for their shares of


unrealized intercompany profit at beg. of year, to restore the carrying value
of equipment to its book value on the date of the intercompany sale

Chapter
7-43

LO 6 Upstream sales- complete equity method.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-16 Prepare the worksheet entries for Dec. 31, 2009.

Original Cost
Selling Price
Difference

Accumulated
Carrying
Depreciation
Cost
Depreciation
Value
Life
Expense
$ 1,350,000 $ 540,000 $
810,000 10 yr $ 81,000
960,000
960,000 10 yr
96,000
$ 390,000 $ 540,000 $ (150,000)
$ (15,000)

3. Accumulated Depreciation

30,000

Other Expenses (Depreciation Expense)

15,000

Investment in Stone Company ($15,000 x 80%)

12,000

Noncontrolling Interest ($15,000 x 20%)

3,000

To reverse amount of excess depreciation recorded during year and to


recognize an equivalent amount of intercompany profit as realized
Chapter
7-44

LO 6 Upstream sales- complete equity method.

Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
P7-16 Prepare the worksheet entries for Dec. 31, 2009.
4. Beg. Retained Earnings - Stone
Common Stock - Stone

1,038,000
525,000

Investment in Stone
Noncontrolling Interest

1,250,400 *
312,600 **

To eliminate investment account and create NCI account


* (($1,263,000 - $675,000) x 8)%) - $180,000 = $290,400 + $960,000 =
$1,250,400
** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
Chapter
7-45

LO 6 Upstream sales- complete equity method.

Calculation
Calculation And
And Allocation
Allocation Of
Of Consolidated
Consolidated
Net
Net Income;
Income; Consolidated
Consolidated Retained
Retained Earnings:
Earnings:
Complete
Complete Equity
Equity Method
Method
Under the Complete Equity Method:

Chapter
7-46

Consolidated net income equals the parent companys


recorded income.

Consolidated retained earnings equals the parent


companys recorded retained earnings.

LO 8 Consolidated net income complete equity method.

Intercompany
Intercompany Interest,
Interest, Rents,
Rents, and
and Service
Service Fees
Fees
Income and expenses relating to interest, fees, and rents
should be reported in consolidation only when they arise from
transactions with parties outside the affiliated group.
Workpaper entry to eliminate intercompany interest:
Interest Income
Interest Expense

XXX
XXX

Workpaper entry to eliminate intercompany payables and receivables:

Chapter
7-47

Notes Payable
Notes Receivable

XXX

Interest Payable
Interest Receivable

XXX

XXX
XXX

LO 10 Intercompany interest, rents, service fees.

Intercompany
Intercompany Interest,
Interest, Rents,
Rents, and
and Service
Service Fees
Fees
Workpaper entry to eliminate intercompany rent:
Rent Income
Rent Expense

XXX
XXX

Intercompany Service Fees


When one affiliate charges fees to another, the form of the
eliminating entry is determined by how the transaction is
recorded by the affiliates.

Chapter
7-48

LO 10 Intercompany interest, rents, service fees.

Intercompany
Intercompany Interest,
Interest, Rents,
Rents, and
and Service
Service Fees
Fees
Eliminating entries relating to intercompany transactions depend
on how these transactions are recorded on the books of the
affiliates. In all cases the financial reporting objectives are:

To include in revenue only the amounts that result from


transactions with parties outside the affiliated group .

To present property in the consolidated balance sheet at its


cost to the affiliated group.

To present accumulated depreciation in the consolidated


balance sheet based on the cost to the affiliated group.

To present depreciation expense in the consolidated income


statement based on the cost to the affiliated group.

Chapter
7-49

LO 10 Intercompany interest, rents, service fees.

Copyright
Copyright
Copyright 2008 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act
without the express written permission of the copyright owner
is unlawful. Request for further information should be
addressed to the Permissions Department, John Wiley & Sons,
Inc. The purchaser may make back-up copies for his/her own
use only and not for distribution or resale. The Publisher
assumes no responsibility for errors, omissions, or damages,
caused by the use of these programs or from the use of the
information contained herein.

Chapter
7-50