Accounting 405 - CHAPTER 7 Handout

7.1 Lindsay is 80% owned by Danielle. Danielle purchased a machine for $8,000 on January 1,
2013. The machine is being depreciated using the straight-line method over a period of 8
years with no salvage value. The machine is sold to Lindsay on December 31, 2015 for
$10,000. Danielle records its 2015 depreciation expense prior to the sale. The accumulated
depreciation of Danielle at the time of the sale is $3,000 (1000 x 3). The remaining useful
life of the machine is five years. Lindsay had reported net income of $150,000 and paid
dividends of $30,000 in 2015. Lindsay reported net income of $130,000 and paid dividends
of $40,000 in 2016. Danielle purchased Lindsay at book value so there is no purchase
differential.

A. Show the entries for the intercompany sale of the machine:

Danielle’s books:

Cash 10,000
Accumulated Depreciation 3,000
Equipment 8,000
Gain on Sale 5,000

Lindsay’s books

Equipment 10,000
Cash 10,000

End of 2015

Danielle’s Books Lindsay’s Books

(if still on Danielle’s books) (on Lindsay after sale)
Equipment 8,000 10,000
Less: Acc. Depreciation 3,000 0
Book Value 5,000 10,000

End of 2016

Danielle’s Books Lindsay’s Books

(if still on Danielle’s books) (on Lindsay after sale)
Equipment 8,000 10,000
Less: Acc. Depreciation 4,000 2,000
Book Value 4,000 8,000
Depreciation Expense 1,000 yr. 2,000 yr.

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B. Show the entries on Danielle’s books for 2015 assuming Danielle uses the complete
equity method to account for the investment.

Investment in L 120,000
Equity in L Income 120,000
(150 * 80%)

Cash (30 * 80%) 24,000

Investment in L 24,000

Equity in L Income 5,000

Investment in L 5,000
(to remove unrealized gain)

REMEMBER Downstream Sale – all of the gain is removed from the investment and
equity in earnings account using the complete equity method. Noncontrolling interest
net income and noncontrolling interest are unaffected by a downstream sale.
Noncontrolling interest net income for 2015 is $30,000 (150,000 * 20%).

C. Show worksheet consolidation entry on December 31, 2015.

Gain on Sale 5,000

Accumulated Depreciation 3,000
Equipment 2,000

D. Show entries on Danielle’s books for 2016 assuming the use of the complete equity
method.

Investment in L 104,000
Equity in L Income 104,000
(130 * 80%)

Cash (40 * 80%) 32,000

Investment in L 32,000

Investment in L (5,000/5) 1,000

Equity in L Income 1,000
(to realize 1/5 of gain through usage)

Remember Downstream Sales do not affect noncontrolling interest.

Noncontrolling interest net income for 2016 is $26,000 (13n0,000 * 20%).

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E. Show worksheet consolidation entry on December 31, 2016 assuming use of the
complete equity method.

Investment in L 5,000
Equipment 2,000
Accumulated Depreciation 2,000
Depreciation Expense 1,000

Remember all of the $1,000 is added to the Investment and Equity in Earnings Account the
next year for 5 years in a downstream sale.

Piecemeal recognition of the Gain 5,000/5 = 1,000. (Every year for 5 years)

F. Assume the sale of the machine took place at the beginning of 2015.

Entries on Danielle’s Books

Investment in L 120,000
Equity in L Income 120,000
(150 * 80%)

Cash (30 * 80%) 24,000

Investment in L 24,000

Equity in L Income 5,000

Investment in L 5,000
(to remove unrealized gain)

Investment in L (5,000/5) 1,000

Equity in L Income 1,000
(to realize 1/5 of gain through usage)

G. Show worksheet consolidation entry on December 31, 2015 assuming the sale was at the
beginning of the year and Danielle uses the complete equity method to account for the
Investment in L.

Gain on Sale 5,000

Equipment 2,000
Accumulated Depreciation 2,000

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 Depreciation Expense 1,000

H. Assume all the same information in 7.1 except that the sale of the machine was an
upstream sale and that Lindsay is 80% owned by Danielle. Show entries on
Danielle’s books for 2015 & 2016 assuming use of the complete equity method.

2015

Investment in L 120,000
Equity in L Income 120,000
(150 * 80%)

Cash (30 * 80%) 24,000

Investment in L 24,000

Equity in L Income 4,000

Investment in L 4,000
(to remove unrealized gain)
(5,000 * 80%)

2016

Investment in L 104,000
Equity in L Income 104,000
(130 * 80%)

Cash (40 * 80%) 32,000

Investment in L 32,000

Investment in L (5,000/5) 800

Equity in L Income 800
(to realize 1/5 of gain through usage)
(4,000/5)

I. Show worksheet consolidation entry on December 31, 2015.

Gain on Sale 5,000

Accumulated Depreciation 3,000
Equipment 2,000

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 REMEMBER: Upstream Sale - Gain of 5,000 and piecemeal recognition (realized
through usage) of gain is allocated 80% to parent and 20% to Noncontrolling
interest. Therefore, noncontrolling interest net income for 2015 is:

29,000 (150,000-5,000) * 20%

Noncontrolling interest net income for 2016 is:

26,200 (130,000+1,000) * 20%

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