CH 07
CH 07
CH 07
7-1
77
Elimination of Unrealized
Gains or Losses on
Intercompany Sales of
Property and Equipment
Learning
Learning Objectives
Objectives
1.
2.
3.
4.
5.
Chapter
7-3
Learning
Learning Objectives
Objectives
6.
7.
8.
9.
10.
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
Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
Upstream Sale
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
200,000
350,000
Cash
350,000
150,000
Additional Entry for Complete
Equity Method: Proctor Only
Chapter
7-7
Equity in income
135,000
Investment in Silex
135,000
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
Chapter
7-8
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
135,000
15,000
Land
150,000
Chapter
7-9
135,000
15,000
150,000
Intercompany
Intercompany Sales
Sales of
of Nondepreciable
Nondepreciable Property
Property
E7-4 Summary Points
1.
2.
Chapter
7-10
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
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.
$ 700,000
600,000
$ 100,000
$ 700,000
400,000
$ 300,000
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
200,000 *
180,000
20,000
200,000 *
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
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:
Chapter
7-15
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
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
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
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
120,000
Accumulated Depreciation
400,000
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)
15,000
15,000
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)
280,000
96,000
24,000
400,000
Chapter
7-21
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)
45,000
30,000
12,000
3,000
To adjust depreciation for the current and prior year on equipment sold to
affiliate.
Chapter
7-22
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
96,000
24,000
Chapter
7-23
400,000
45,000
30,000
12,000
3,000
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
Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Year Subsequent to Intercompany Sale
Upstream Sale
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
(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
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
$
$
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
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
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)
390,000
120,000
30,000
Accumulated Depreciation
540,000
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
15,000
12,000
3,000
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
1,038,000
525,000
Investment in Shannon
1,250,400
Noncontrolling Interest
312,600
Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Year Subsequent to Intercompany Sale
Upstream Sale
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
(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
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
$
$
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
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
Chapter
7-35
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)
390,000
120,000
30,000
540,000
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
15,000
12,000
3,000
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
Intercompany
Intercompany Sales
Sales of
of Depreciable
Depreciable Property
Property
Year Subsequent to Intercompany Sale
Upstream Sale
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
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
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
$
$
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
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
Chapter
7-42
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)
390,000
120,000
30,000
540,000
Chapter
7-43
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
15,000
12,000
3,000
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 **
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
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
Chapter
7-47
Notes Payable
Notes Receivable
XXX
Interest Payable
Interest Receivable
XXX
XXX
XXX
Intercompany
Intercompany Interest,
Interest, Rents,
Rents, and
and Service
Service Fees
Fees
Workpaper entry to eliminate intercompany rent:
Rent Income
Rent Expense
XXX
XXX
Chapter
7-48
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:
Chapter
7-49
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Chapter
7-50