Chapter 6

Intercompany
Profit
Transactions –
Plant Assets
Intercompany Profits – Plant Assets:
Objectives
1. Assess the impact of intercompany profit on
transfers of plant assets in preparing
consolidations workpapers.
2. Defer unrealized profits on plant asset transfers by
either the parent or subsidiary.
3. Recognize realized, previously-deferred profits on
plant asset transfers.
4. Adjust the calculations of noncontrolling interest
share in the presence of intercompany profits on
plant asset transfers.

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 Intercompany Profit Transactions – Plant Assets

1: TRANSFERS OF PLANT
ASSETS

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Intercompany Fixed Asset Sales

Intercompany sales of nondepreciable fixed assets:

In year of intercompany sale
– Defer any gain or loss
– Restate fixed asset to cost
In years of continued ownership
– Adjust investment account to defer gain or loss
(adjust noncontrolling interest too, if upstream sale)
– Restate fixed asset to cost
In year of sale to outside entity
– Adjust investment account (and noncontrolling
interest if upstream sale)
– Recognize the previously deferred gain or loss

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Intercompany Sale of Land

Pak owns 90% of San, acquired at cost equal

to fair value. In 2011, Pak sells (downstream)
land to San and records a $10 gain. In 2015,
San sells the land to an outside entity at a
$15 gain. San's separate income was $70 in
2011, $80 per year for 2012 to 2014, and $90
in 2015.

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2011 Calculations

Defer the unrealized gain, with full effect to Pak

– Pak's Income from San
90%(70) – 10 = $53
– Noncontrolling interest share
10%(70) = $7
Elimination entry for 2009 Worksheet

Gain on sale of land (-Ga, -SE) 10

Land (-A) 10

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2012 to 2014 Calculations
Continue to defer gain, with full effect to Pak
– Pak's Income from San
90%(80) = $72
– Noncontrolling interest share
10%(80) = $8
Elimination entry for Worksheets in 2012 to 2014

Investment in San (+A) 10

Land (-A) 10

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2015 Calculations

Recognize the previously deferred gain, with full effect

to Pak
– Pak's Income from San
90%(90) + 10 = $91
– Noncontrolling interest share
10%(90) = $9
Elimination entry for 2015 Worksheet

Investment in San (+A) 10

Gain on sale of land (Ga, +SE) 10

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 Intercompany Profit Transactions – Plant Assets

2: DEFERRING
UNREALIZED PROFITS

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Unrealized Profits on Fixed Assets

Unrealized profit or loss on nondepreciable

fixed assets
– Defer in year of intercompany sale
– Continue deferring by adjusting the investment
in subsidiary (and noncontrolling interest if
upstream)
– Recognize full profit or loss upon resale to
outside entity

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Depreciable Fixed Assets

Gains and losses on intercompany sales of

depreciable fixed assets
– Defer in period of intercompany sale
– Recognize gain or loss over remaining life of
asset
• Adjust asset and depreciation down for gains
• Adjust asset and depreciation up for losses
– Recognize any unamortized gain or loss upon
sale to outside entity

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Downstream Example

Per owns 80% of Sop, acquired at cost equal

to fair value. On 1/1/2011, Per sells
machinery to Sop at a $30 profit. The
machinery has a remaining life of 5 years
from 1/1/2011. Sop disposes of the machinery
at book value at the end of 5 years. Sop's
income is $70 in 2011, $80 per year for 2012
to 2014, and $90 in 2015.

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2011 Calculations

Defer the unrealized gain and amortize it over 5 years

with full effect to Per
30 gain / 5 years = $6
– Per's Income from Sop
80%(70) – 30 + 6 = $32
– Noncontrolling interest share
20%(70) = $14
Elimination entry for 2011 Worksheet
Gain on sale of machinery (-Ga, -SE) 30
Machinery (-A) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6
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 Intercompany Profit Transactions – Plant Assets

3: RECOGNIZING
REALIZED, PREVIOUSLY
DEFERRED PROFITS

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Previously Deferred Gains/Losses

Recognize over the life of the depreciable

asset
– Downstream sales
• Adjust investment in subsidiary account
– Upstream sales
• Adjust investment in subsidiary account and
noncontrolling interest, proportionately
– Intercompany sales at a gain
• Adjust asset and depreciation down
– Intercompany sales at a loss
• Adjust asset and depreciation up

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2012 to 2014 Calculations
Continue to recognize part of the gain, with full effect
to Per
– Per's Income from Sop
80%(80) + 6 = $70
– Noncontrolling interest share
20%(80) = $16
Elimination entry for Worksheets in 2012

Investment in Sop (+A) 24

Accumulated depreciation (+A) 6
Machinery (-A) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6

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Entries (cont.)

Worksheet entries for 2013

Investment in Sop (+A) 18
Accumulated depreciation (+A) 12
Machinery (-A) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6

Worksheet entries for 2014

Investment in Sop (+A) 12
Accumulated depreciation (+A) 18
Machinery (-A) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6

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2015 Calculations

Recognize the remaining deferred gain, with full

effect to Per
– Per's Income from Sop
80%(90) + 6 = $78
– Noncontrolling interest share
20%(90) = $18
Elimination entries for 2015 Worksheet

Investment in Sop (+A) 6

Accumulated depreciation (+A) 24
Machinery (-A) 30
Accumulated depreciation (+A) 6
Depreciation expense (-E, +SE) 6

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 Intercompany Profit Transactions – Plant Assets

4: IMPACT ON
NONCONTROLLING
INTEREST

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Sharing Unrealized Gain or Loss

Upstream sales of fixed assets require:

– Deferring the gain or loss on the sale
– Recognizing a portion of the gain or loss as the
asset depreciates
– Writing off any unrecognized gain or loss upon
the sale of the asset
– Sharing the gains and losses between the
controlling and noncontrolling interests
Upstream sales impact noncontrolling
interests!

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Upstream Example

Pail owns 70% of Shovel, acquired at cost

equal to fair value. On 1/1/2011, Shovel sells
machinery to Pail at a $40 profit. The
machinery has a remaining life of 5 years
from 1/1/2011. Pail uses the machinery for
four years, then sells it at a profit at the start
of 2015. Shovel's income is $70 in 2011, $80
per year for 2012 to 2014, and $90 in 2015.

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2011 Calculations
Defer the unrealized gain and amortize it over 5 years
sharing the gain
40 gain / 5 years = $8
– Pail's Income from Shovel
70%(70 – 40 + 8) = $26.6
– Noncontrolling interest share
30%(70 – 40 + 8) = $11.4
Elimination entry for 2011 Worksheet

Gain on sale of machinery (-Ga, -SE) 40

Machinery (-A) 40
Accumulated depreciation (+A) 8
Depreciation expense (-E, +SE) 8

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2012 to 2014 Calculations

Continue to recognize part of the gain, sharing

its effect between the controlling and
noncontrolling interests
– Pail's Income from Shovel
70%(80 + 8) = $61.6
– Noncontrolling interest share
30%(80 + 8) = $26.4

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2012 Worksheet Entries

Elimination entry for Worksheets in 2012

Investment in Shovel (+A) 22.4

Noncontrolling interest (-SE) 9.6

Accumulated depreciation (+A) 8.0

Machinery (-A) 40.0

Accumulated depreciation (+A) 8.0

Depreciation expense (-E, +SE) 8.0

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2013 Worksheet Entries

Worksheet entries for 2013

Investment in Shovel (+A) 16.8

Noncontrolling interests (-SE) 7.2

Accumulated depreciation (+A) 16.0

Machinery (-A) 40

Accumulated depreciation (+A) 8.0

Depreciation expense (-E, +SE) 8.0

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2014 Worksheet Entries

Worksheet entries for 2014

Investment in Shovel (+A) 11.2

Noncontrolling interest (-SE) 4.8

Accumulated depreciation (+A) 24.0

Machinery (-A) 40.0

Accumulated depreciation (+A) 8.0

Depreciation expense (-E, +SE) 8.0

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2015 Calculations
Recognize the remaining deferred gain, sharing the impact with
controlling and noncontrolling interests
– Unamortized gain = 1 year at $8
– Pail's Income from Shovel
70%(90 + 8) = $68.6
– Noncontrolling interest share
30%(90 + 8) = $29.4
Elimination entries for 2015 Worksheet

Investment in Shovel (+A) 5.6

Noncontrolling interests (-SE) 2.4
Accumulated depreciation (+A) 32.0
Machinery (-A) 40.0
Accumulated depreciation (+A) 8.0
Gain on sale of machinery (Ga, +SE) 8.0

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Sale at Other Than Fair Value

Intercompany sales of fixed assets at prices

other than fair value
– Deserve scrutiny by shareholders
– Sales above fair value move additional cash to
the seller
– Sales below fair value transfer valuable goods to
the buyer
– There is a transfer of wealth between the
affiliated companies, and between the controlling
and noncontrolling interests

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Inventory Items  Fixed Assets

An intercompany sale of inventory which is

acquired as a fixed asset
– Unrealized profit is removed from cost of sales in
year of sale
– Profit is recognized over the fixed asset's life

Cost of sales (E, -SE) XXX

Machinery (-A) XXX

Accumulated depreciation (+A) X

Depreciation expense (-E, +SE) X

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