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    Intercompany Sale of Depreciable Assets

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    Triechia Laud
    This document discusses intercompany transactions involving depreciable assets. It provides an example where a parent company, P Corp, sells equipment to its subsidiary, S Co. The equipment was originally purchased by P Corp for $100,000 and had accumulated depreciation of $30,000 at the time of the intercompany sale for $77,000. The document outlines the accounting entries made by both companies and provides consolidation adjustments to eliminate the unrealized gain and reconcile the accounts to the original amounts in P Corp's books.

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    Intercompany Sale of Depreciable Assets

    Uploaded by

    Triechia Laud
    2K views2 pages
    This document discusses intercompany transactions involving depreciable assets. It provides an example where a parent company, P Corp, sells equipment to its subsidiary, S Co. The equipment was originally purchased by P Corp for $100,000 and had accumulated depreciation of $30,000 at the time of the intercompany sale for $77,000. The document outlines the accounting entries made by both companies and provides consolidation adjustments to eliminate the unrealized gain and reconcile the accounts to the original amounts in P Corp's books.

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    Brief discussion about intercompany sale of Depreciable Assets

    Original Title

    INTERCOMPANY SALE OF DEPRECIABLE ASSETS

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    This document discusses intercompany transactions involving depreciable assets. It provides an example where a parent company, P Corp, sells equipment to its subsidiary, S Co. The equipment was originally purchased by P Corp for $100,000 and had accumulated depreciation of $30,000 at the time of the intercompany sale for $77,000. The document outlines the accounting entries made by both companies and provides consolidation adjustments to eliminate the unrealized gain and reconcile the accounts to the original amounts in P Corp's books.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2K views2 pages

    Intercompany Sale of Depreciable Assets

    Uploaded by

    Triechia Laud
    This document discusses intercompany transactions involving depreciable assets. It provides an example where a parent company, P Corp, sells equipment to its subsidiary, S Co. The equipment was originally purchased by P Corp for $100,000 and had accumulated depreciation of $30,000 at the time of the intercompany sale for $77,000. The document outlines the accounting entries made by both companies and provides consolidation adjustments to eliminate the unrealized gain and reconcile the accounts to the original amounts in P Corp's books.

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    INTERCOMPANY TRANSACTIONS WITH DEPRECIABLE ASSETS

    Many business transactions between a parent company and its subsidiary involve a profit (gain) or loss.
    Among these transactions are intercompany sales of merchandise and intercompany sales of plant assets.
    This paper will focus on the discussion and illustration involving intercompany transactions with
    depreciable assets.

     Intercompany Sales of Property Plant and Equipment


    Intercompany sales of property, plant and equipment differ from intercompany sales of merchandise
    in two aspects.

    1. Intercompany sales of PPE between affiliated companies are unusual transactions, while
    intercompany sales of merchandise occur frequently.
    2. The relatively long useful lives of PPE require the passage of many accounting periods
    before intercompany gains or losses on sales of these assets are realized in transactions
    with outsiders.

    Unrealized intercompany gains on a depreciable PPE are viewed as being realized gradually over
    the remaining life of the asset as it is used by the purchasing affiliate. In effect, a portion of the
    unrealized gain is realized each period as benefits are derived from the asset.

    ILLUSTRATION: Downstream Sale


    Assume that P Corp. sells equipment to S Co. on January 01, 2020, for 77,000.00. The equipment originally
    cost P Corp. 100,000.00 when purchased three years ago, and is being depreciated over total life of 10 years
    using the straight-line method with no residual value. After the acquisition, S Co. depreciated the equipment
    over its remaining useful life using the same method. The book value of the equipment immediately before
    the sale by P Corp. is computed below:
    Original Cost to P Corp. 100,000
    Accumulated Depreciation on Dec. 31, 2020: (30,000)
    100,000/10) x 3
    Book Value, 12/31/2020 70, 000

    Sales Price 77,000


    Book Value (70,000)
    Gain on Sale of Equipment 7,000

    12/31/2020- P Corp.
    ACCOUNT Debit Credit
    Cash 77,000
    Equipment- cost 90,000
    Accumulated Depreciation 30,000
    Gain on Sale 7,000
    Table 1: Summary of transactions in the books of P Corp.

    12/31/2020- S Co.
    ACCOUNT Debit Credit
    Cash 77,000
    Equipment 77,000
    Table 2: Summary of transactions in the books of S Co.

    The consolidation adjustments for this intercompany sale are as follows:


    1. No gain or loss in the intercompany sale is recognized.
    2. Depreciation expense should be reported as if the equipment was depreciated by
    the seller.
    3. The carrying amount of the equipment should be reported at the amounts that were
    supposed to be reported in the seller’s books as if the transaction had never
    happened.
    CONSOLIDATION ADJUSTMENTS

    Balances from Separate F/S ADJUSTMENTS CONSOLIDATED


    F/S
    12/31/2020 P Corp. S Co. DEBIT CREDIT 12/31/2020
    Gain on Sale 7,000 - 7,000* -
    Depreciation - 11,000 1,000** 10,000
    Expense
    Equipment- - 77,000 23,000*** 100,000
    Cost
    Accumulated - (11,000) 29,000 (40,000)
    Depreciation
    Equipment- 66,000 60,000
    net

    * Since it was stated that no gain or loss in the intercompany sale is recognized, the gain on sale of 7,000
    shall be eliminated in the Consolidation adjustments.

    ** Since it was stated that depreciation expense should be reported as if no intercompany sale had
    happened, the depreciation expense of 11,000 shall be reduced to 10,000, which was the same
    depreciation expense reported by the seller.

    *** Since it was stated that the carrying amount of the equipment should be reported at the amounts
    that were supposed to be reported in the sellers book without any sale has been made, the equipment
    cost shall be increased by 23,000 to arrive at the original cost of the equipment which was 100,000.

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