Chapter 6 Intercompany sale of fixed assets

1
Chapter 6 Inter-company sale of fixed assets

• The concept
• Any inter-company sale of fixed assets between
  the parent and subsidiary should not be treated
  as sale from the consolidated point of view.
  Therefore, eliminating entry would be necessary
  for consolidation.

2
Asset transfers involving land (Non-depreciable
asset)

• Downstream sale
• (Sale from parent to subsidiary)
• In the year of sale, the eliminating entry would
  be
• (assume that P sold a piece of land to S at a
  gain of 15,000)
• Gain on sale of land
  15,000
• Land
  
  15,000
• In subsequent year
• Retained earnings- January 1
  15,000
• Land
  
  15,000

3
Upstream sale of land

• In the year of sale
• Gain on sale of land
  15,000
• Land
  
  15,000
• Please note that current practice requires that
  all inter-company profit be eliminated completely
• Therefore, if an 80-owned subsidiary reports a
  net income of 100,000, the income assigned to
  minority interest would be modified as follows
• Income to Minority interest 20 x (100,000
  - 15,000)
• 
  17,000

4
Upstream sale of land (continued)

• In subsequent years, the eliminating entries
  would be
• Retained earnings- January 1
  12,000
• Minority interest
  3,000
• Land
  
  15,000

5
Downstream sale of depreciable asset

• Assume that P sold an equipment on January 1,
  20x1 with cost of 100,000 and accumulated
  depreciation of 40,000 to S for 70,000. The
  remaining useful life is 4 years.
• The eliminating entries in the year of sale
  (20x1)
• (a) Equipment
  30,000
• Gain on sale of equipment
  10,000
• Accumulated depreciation
  40,000
• (b) Accumulated depreciation
  2,500
• Depreciation expense
  2,500

6
(continued)

• In the 2nd year after the sale (20x2)
• (a) Equipment
  30,000
• Retained earnings- January 1
  7,500
• Accumulated
  depreciation 37,500
• (b) Accumulated deprecation
  2,500
• Depreciation
  expense 2,500

7
Upstream sale of equipment

• Assume that same data as the above example,
  except the sale is upstream.
• In the year of sales (20x1)
• (a) Equipment
  30,000
• Gain on sale of equipment
  10,000
• Accumulated
  depreciation 40,000
• (b) Accumulated depreciation
  2,500
• Depreciation
  expense 2,500

8
Upstream sale of equipment (continued)

• Please note that the 100 of gain is eliminated
  in the upstream sale also. Part of adjustment,
  however, is for the minority interest.
• Therefore, the minority interest income is
  modified as follows
• 20 x (net income - gain
  piecemeal recognition)
• 20 (100,000 - 10,000 2,500)
• 18,500

9
Upstream sale of equipment (continued)

• Eliminating entries In the 2nd year (20x2)
• (a) Equipment
  30,000
• Retained earnings- January 1
  6,000
• Minority interest
  1,500
• Accumulated depreciation
  37,500
• (b) Accumulated depreciation
  2,500
• Depreciation expense
  2,500

10
Upstream sale of equipment (continued)

• In subsequent year, the minority interest income
  is modified as follows
• Minority interest income
• 20 x (net income piecemeal recognition)
• 20 x (net income 2,500)