CH 07

Slide 7-1
7
Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment
Advanced Accounting, Fourth Edition

Slide 7-2
Learning Objectives
1. Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements. Explain the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Explain when gains or losses on intercompany sales of depreciable assets should be recognized on a consolidated basis. Explain the term realized through usage. Describe the differences between upstream and downstream sales in determining consolidated net income and the controlling and noncontrolling interests in consolidated income.
2.
3.
4. 5.
Slide 7-3
Learning Objectives
6. Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company. Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Describe the eliminating entry needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.
7. 8. 9.
10. Explain the basic principles used to record or eliminate intercompany interest, rent, and service fees.
Slide 7-4
Intercompany Sales of Nondepreciable 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.
Slide 7-5
LO 1 Financial reporting objectives nondepreciable property.

Upstream Sale
E7-4 (variation): Procter Company owns 90% of the outstanding stock of Silex Company. On January 1, 2011, Silex Company sold land to Procter Company for $350,000. Silex had originally purchased the land on June 30, 2007,
for $200,000.
Procter Company plans to construct a building on the land bought from Silex in which it will house new production
machinery. The estimated useful life of the building and the

new machinery is 15 years.
Slide 7-6

E7-4 (variation): Entries made on the books of each affiliate to record this intercompany sale in 2011.
Entry on Books of Silex Cash Land 350,000 200,000 Entry on Books of Procter Land Cash 350,000 350,000
Gain on sale
150,000
Additional Entry for Complete Equity Method: Proctor Only
Note: No further entries are recorded on the books of Procter until the land is sold to outsiders.
Equity in income
135,000
Investment in Silex
135,000
To reduce its income from subsidiary by its share of the intercompany gain ($150,000 x 90%).
Slide 7-7

E7-4: B(1). Prepare the workpaper entries necessary because of the intercompany sale of land for the year ended December 31, 2011. Gain on Sale of Land Land ($350,000 - $200,000) 150,000 150,000
To eliminate the $150,000 gain reported by Silex Company and to reduce the land balance from the $350,000 recorded on the books of Procter to its $200,000 cost to the affiliated group.
Slide 7-8

E7-4: B(2). Prepare the workpaper entries for the year ended December 31, 2012.
Cost Method and Partial Equity Method Beg. Retained Earnings Procter (90%) Noncontrolling Interest (10%) Land Complete Equity Method Investment in Silex Company (90%) Noncontrolling Interest (10%) Land 135,000 15,000 150,000 135,000 15,000 150,000
Upstream Sale
Slide 7-9

E7-4: Summary Points 1. Proctor (parent) continues to report the land on their statements at the intercompany selling price of $350,000. However, in the consolidated balance sheet, the land is reported at its cost to the affiliated group of $200,000. 2. If the intercompany seller had been the parent (downstream sale), the entire $150,000 would go to the controlling interest, resulting in a $150,000 debit to the beginning retained earnings of the parent company.
Slide 7-10

Sales to Outsiders
E7-6: P Company owns 90% of the outstanding common stock of S Company. On January 1, 2011, S Company sold land to P Company for $600,000. S Company originally purchased the land for $400,000. On January 1, 2012, 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 2012.
Slide 7-11

E7-6: A. Calculate the gain on the sale of the land that is recognized on the books of P Company in 2012. Selling price to third party Cost of land to P Company Gain recognized by P Company $ 700,000 600,000 $ 100,000
B. Calculate the gain that should be recognized in the consolidated statements in 2012.
Selling price to third party Cost of land to affiliate group Gain recognized in consolidation
Slide 7-12
$ 700,000 400,000 $ 300,000

E7-6: C. Prepare the workpaper entries for the year ended December 31, 2012.
Cost Method and Partial Equity Method Beg. Retained Earnings Procter (90%) Noncontrolling Interest (10%) Gain on Sale of Land Complete Equity Method Investment in Silex Company (90%) Noncontrolling Interest (10%) Gain on Sale of Land 180,000 20,000 200,000 * 180,000 20,000 200,000 *
* Gain recognized in consolidation less gain recognized by P Company ($300,000 - $100,000 = $200,000).
Slide 7-13
Intercompany Sales of Depreciable Property (Machinery, Equipment, and 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.
Slide 7-14
LO 4 Intercompany gain realized through usage.

When there have been intercompany sales of depreciable property, workpaper entries are necessary: To report only those gains or losses that result from the sale of depreciable property to outside parties. To present property in the consolidated balance sheet at its cost to the affiliated group. To present accumulated depreciation in the consolidated balance sheet based on the cost to the affiliated group. To present depreciation expense in the consolidated income statement based on the cost to the affiliated group.
Slide 7-15
LO 2 Financial reporting objectives depreciable property.

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.
Slide 7-16
LO 2 Financial reporting objectives depreciable property.
Intercompany Sales of Depreciable Property

Upstream Sale P7-1 (Cost or Partial Equity): Powell Company owns 80% of the outstanding common stock of Sullivan Company. On June 30, 2011, 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, 2011. In 2012, 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).
Slide 7-17
LO 6 Subsidiary vs. parent as the seller.

P7-1: Entries on the books of Powell and Sullivan to record the intercompany sale are: Powell Company Equipment Cash Sullivan Company Cash Accumulated Depreciation Equipment Gain on Sale of Equipment
Slide 7-18
500,000
500,000
500,000 400,000
780,000 120,000

P7-1: A. Prepare the workpaper entries necessary because of the sale of equipment for the year ended December 31, 2011.
2011
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 Gain on Sale of Equipment Accumulated Depreciation
280,000 120,000 400,000
To eliminate the intercompany gain and restore equipment to its original cost to the consolidated entity.
Slide 7-19

2011
Accumulated Depreciation - Equipment Depreciation Expense ($30,000/2)
15,000 15,000
To adjust depreciation expense to the correct amount to the consolidated entity, thus realizing a portion of the gain through usage.
Slide 7-20

2012
Equipment (to original cost) Beg. Retained Earnings - Powell ($120,000 x 80%) Noncontrolling Interest ($120,000 x 20%) Accumulated Depreciation - Equipment
280,000 96,000 24,000 400,000
To eliminate prior period intercompany gain and restore equipment to its original cost to the consolidated entity.
Slide 7-21
LO 7 Computing the noncontrolling interest.

2012
Accumulated Depreciation - Equipment 45,000 Depreciation Expense ($120,000/4) Beg. Retained Earnings Powell ($15,000 x 80%) Noncontrolling Interest ($15,000 x 20%)
30,000 12,000 3,000
To adjust depreciation for the current and prior year on equipment sold to affiliate.
Slide 7-22

P7-1 (variation): For the Compete Equity Method, the 2012 workpaper entries would have changed as follows:
Equipment (to original cost) Investment in Sullivan ($120,000 x 80%) Noncontrolling Interest ($120,000 x 20%)
Accumulated Depreciation - Equipment Accumulated Depreciation - Equipment Depreciation Expense ($120,000/4) Investment in Sullivan ($15,000 x 80%) Noncontrolling Interest ($15,000 x 20%)
Slide 7-23
280,000 96,000 24,000

400,000 45,000 30,000 12,000 3,000

P7-1 (variation): If this had been a Downstream sale, the 2012 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.
Slide 7-24

Year Subsequent to Intercompany Sale
Upstream Sale P7-6 (Cost Method): Pitts Company owns 80% of the common stock of Shannon Company. The stock was purchased for $960,000 on January 1, 2009, when Shannon Companys retained earnings were $675,000. On January 1, 2011, Shannon Company sold fixed assets to Pitts Company for $960,000; Shannon Company had purchased these assets for $1,350,000 on January 1, 2001, at which time their estimated useful life was 25 years. The estimated remaining useful life to Pitts Company on 1/1/11 is 10 years. Both companies employ the straight-line method of depreciation. Required: A. Prepare a consolidated statements workpaper for the year ended December 31, 2012.
Slide 7-25
LO 6 Workpaper entries-upstream sales.

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 Shannon $ 1,350,000 1,350,000 900,000 150,000 1,050,000 300,000 $ 300,000 $ 60,000 $ Eliminations Debit Credit 60,000 (4)
(3)
NCI
15,000
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
120,000 (2) 290,400 12,000 1,038,000 1,038,000 (5) 435,000 300,000 60,000 15,000 (150,000) (75,000) 60,000 $ 1,500,000 $ 1,263,000 $ 1,218,000 $ 377,400 1,215,000
(1) (3)
1,397,400 627,000 (150,000) 1,874,400
63,000 (4) (15,000) $ 48,000 $
NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000

Slide 7-26

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 $ 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 $ 450,000 525,000 1,263,000 Eliminations Debit Credit 290,400 390,000 30,000
(1) (2) (3)
NCI
(5) (2)
1,250,400 540,000
$ $
525,000 1,218,000 30,000
(5) (2)
377,400 312,600 3,000
(5) (3)
48,000 285,600 333,600
Consolidated Balances $ 723,000 5,183,100 (2,022,000) $ 3,884,100 $ 915,600 760,500 1,874,400 333,600 3,884,100
Total liab. & equity $
2,726,100
2,238,000
2,483,400
$ 2,483,400
Slide 7-27

P7-6: Prepare the worksheet entries for Dec. 31, 2012.
Acquisition date retained earnings - Shannon $ 675,000 Retained earnings 1/1/12 - Shannon 1,038,000 Increase 363,000 Ownership percentage 80% $ 290,400
1. Investment in Shannon Company 290,400
Retained Earnings Pitts

To establish reciprocity/convert to equity
290,400
Slide 7-28

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)
Original Cost Selling Price Difference
2. Plant and Equipment Retained Earnings Pitts ($150,000 x 80%) Noncontrolling Interest ($150,000 x 20%) Accumulated Depreciation
390,000 120,000 30,000
540,000
To reduce controlling and noncontrolling interests for their shares of unrealized intercompany profit at beg. of year, to restore fixed assets to its book value to the selling affiliate on the date of the intercompany sale
Slide 7-29

3. Accumulated Depreciation Other Expenses (Depreciation Expense) Retained Earnings Pitts ($15,000 x 80%) Noncontrolling Interest ($15,000 x 20%)
30,000 15,000 12,000 3,000
To reverse amount of excess depreciation recorded during year and to recognize an equivalent amount of intercompany profit as realized
Slide 7-30

P7-6: Prepare the worksheet entries for Dec. 31, 2012. 4. Dividend Income Dividends Declared
To eliminate intercompany dividends
60,000 60,000
5. Beg. Retained Earnings - Shannon Common Stock - Shannon
1,038,000 525,000
Investment in Shannon
Noncontrolling Interest
To eliminate investment account and create NCI account
Slide 7-31
1,250,400
312,600

Upstream Sale P7-12 (Partial Equity Method): Prather Company owns 80% of the common stock of Stone Company. The stock was purchased for $960,000 on January 1, 2009, when Stone Companys retained earnings were $675,000. On January 1, 2011, Stone Company sold fixed assets to Prather Company for $960,000; Stone Company had purchased these assets for $1,350,000 on January 1, 2001, at which time their estimated useful life was 25 years. The estimated remaining useful life to Prather Company on 1/1/11 is 10 years. Both companies employ the straight-line method of depreciation. Required: A. Prepare a consolidated statements workpaper for the year ended December 31, 2012.
Slide 7-32

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 Stone $ 1,350,000 1,350,000 900,000 150,000 1,050,000 300,000 $ 300,000 $ 240,000 $ Eliminations Debit Credit 240,000
(1)
NCI
15,000 (3)
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
Retained Earnings Statement Retained earnings, 1/1 Pitts 1,505,400 120,000 Shannon 1,038,000 1,038,000 Net income 615,000 300,000 240,000 Dividends declared (150,000) (75,000) Retained earnings, 12/31 $ 1,970,400 $ 1,263,000 $ 1,398,000
(2) (4)
12,000 (3) 15,000 63,000 60,000 (1) (15,000) 87,000 $ 48,000 $
1,397,400 627,000 (150,000) 1,874,400

Slide 7-33

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 $ Stone 225,000 Eliminations Debit Credit 1,250,400 180,000 540,000
(4) (1) (2)
NCI
Consolidated Balances $ 723,000 5,183,100 (2,022,000) 3,884,100 915,600 760,500 1,874,400 333,600 3,884,100
$ $
2,168,100 (900,000) 3,196,500 $ 465,600 760,500 1,970,400 $
2,625,000 (612,000) 2,238,000 450,000 525,000 1,263,000
390,000 30,000
(2) (3)
$ $ 525,000 1,398,000 30,000

(4) (2)
87,000 312,600 3,000
(4) (3)
48,000 285,600 333,600
3,196,500
2,238,000
2,373,000
$ 2,373,000
Slide 7-34

P7-12: Prepare the worksheet entries for Dec. 31, 2012. 1. Equity In Subsidiary Income Investment in Stone Company
To reverse the effect of parent company entries during the year for subsidiary dividends and income
240,000 60,000 180,000
Dividends Declared ($75,000 x 80%)
Slide 7-35

2. Plant and Equipment Retained Earnings Prather ($150,000 x 80%) Noncontrolling Interest ($150,000 x 20%) Accumulated Depreciation
390,000 120,000 30,000
540,000
To reduce controlling and noncontrolling interests for their shares of unrealized intercompany profit at beg. of year, to restore fixed assets to its book value to the selling affiliate on the date of the intercompany sale
Slide 7-36

3. Accumulated Depreciation Other Expenses (Depreciation Expense) Retained Earnings Prather ($15,000 x 80%) Noncontrolling Interest ($15,000 x 20%)
30,000 15,000 12,000 3,000
Slide 7-37

P7-12: Prepare the worksheet entries for Dec. 31, 2012. 4. Beg. Retained Earnings - Stone Common Stock - Stone Investment in Stone Noncontrolling Interest
* (($1,263,000 - $675,000) x 80%) - $180,000 = $290,400 + $960,000 = $1,250,400 ** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
Slide 7-38
1,038,000 525,000 1,250,400 * 312,600 **

Upstream Sale P7-16 (Complete Equity Method): Prather Company owns 80% of the common stock of Stone Company. The stock was purchased for $960,000 on January 1, 2009, when Stone Companys retained earnings were $675,000. On January 1, 2011, Stone Company sold fixed assets to Prather Company for $960,000; Stone Company had purchased these assets for $1,350,000 on January 1, 2001, at which time their estimated useful life was 25 years. The estimated remaining useful life to Prather Company on 1/1/11 is 10 years. Both companies employ the straight-line method of depreciation. Required: A. Prepare a consolidated statements workpaper for the year ended December 31, 2012.
Slide 7-39
LO 6 Upstream sales- complete equity method.

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 Stone $ 1,350,000 1,350,000 900,000 150,000 1,050,000 300,000 $ 300,000 $ 252,000 $ Eliminations Debit Credit 252,000 (1) NCI Consolidated Balances $ 3,300,000 3,300,000 2,250,000 360,000 2,610,000 690,000 (63,000) $ 627,000
15,000 (3)
15,000
63,000 63,000
Retained Earnings Statement Retained earnings, 1/1 Panther 1,397,400 Stone 1,038,000 1,038,000 (5) Net income 627,000 300,000 252,000 Dividends declared (150,000) (75,000) Retained earnings, 12/31 $ 1,874,400 $ 1,263,000 $ 1,290,000 $
15,000 63,000 60,000 (1) (15,000) 75,000 $ 48,000 $
1,397,400 627,000 (150,000) 1,874,400

Slide 7-40

P7-16 (Complete Equity Method):
Balance Sheet Inventory Investment in S Panther $ 498,000 1,334,400 $ Stone 225,000 Eliminations Debit Credit 120,000
(2)
NCI
(1) (3) (4) (2)
Fixed assets Accum. Depreciation Total assets Liabilities Common stock Retained earnings NCI in net assets
$ $
2,168,100 (900,000) 3,100,500 $ 465,600 760,500 1,874,400 $
2,625,000 (612,000) 2,238,000 450,000 525,000 1,263,000
390,000 30,000
(2) (3)
192,000 12,000 1,250,400 540,000
Consolidated Balances $ 723,000 -
$ $ 525,000 1,290,000 30,000

(4) (2)
75,000 312,600 3,000
(5) (3)
48,000 285,600 333,600
5,183,100 (2,022,000) 3,884,100 915,600 760,500 1,874,400 333,600 3,884,100
3,100,500
2,238,000
2,385,000
$ 2,385,000
Slide 7-41

P7-16: Prepare the worksheet entries for Dec. 31, 2012. 1. Equity in Subsidiary Income Investment in Stone Company
To reverse the effect of parent company entries during the year for subsidiary dividends and income
252,000 60,000 192,000
Dividends Declared ($75,000 x 80%)
Slide 7-42

2. Plant and Equipment Investment in Stone ($150,000 x 80%) Noncontrolling Interest ($150,000 x 20%) Accumulated Depreciation
390,000 120,000 30,000
540,000
To reduce controlling and noncontrolling interests for their shares of unrealized intercompany profit at beg. of year, to restore the carrying value of equipment to its book value on the date of the intercompany sale
Slide 7-43

3. Accumulated Depreciation Other Expenses (Depreciation Expense) Investment in Stone Company ($15,000 x 80%) Noncontrolling Interest ($15,000 x 20%)
30,000 15,000 12,000 3,000
Slide 7-44

4. Beg. Retained Earnings - Stone Common Stock - Stone

Investment in Stone Noncontrolling Interest
1,038,000 525,000 1,250,400 * 312,600 **

* (($1,263,000 - $675,000) x 8)%) - $180,000 = $290,400 + $960,000 = $1,250,400 ** [$240,000 + ($1,038,000 - $675,000) x 20%] = $312,600
Slide 7-45
Calculation And Allocation Of Consolidated Net Income; Consolidated Retained Earnings: Complete Equity Method
Under the Complete Equity Method:
Consolidated net income equals the parent companys recorded income.
Consolidated retained earnings equals the parent companys recorded retained earnings.
Slide 7-46
LO 8 Consolidated net income complete equity method.
Intercompany Interest, Rents, and Service 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
Workpaper entry to eliminate intercompany payables and receivables: Notes Payable Notes Receivable Interest Payable Interest Receivable
Slide 7-47
XXX XXX XXX XXX
LO 10 Intercompany interest, rents, service fees.

Workpaper entry to eliminate intercompany rent: Rent Income Rent Expense XXX XXX
Intercompany Service Fees

When one affiliate charges fees to another, the form of the eliminating entry is determined by how the transaction is recorded by the affiliates.
Slide 7-48

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: To include in revenue only the amounts that result from
transactions with parties outside the affiliated group.
To present property in the consolidated balance sheet at its cost to the affiliated group. To present accumulated depreciation in the consolidated balance sheet based on the cost to the affiliated group.
To present depreciation expense in the consolidated income statement based on the cost to the affiliated group.
Slide 7-49
APPENDIX - Deferred Tax Consequences Related to Intercompany Sales of Equipment

Illustration: P Company owns a 70% interest in S Company and that on January 1, 2008, S Company sells P Company equipment with a book value of $500,000 (original cost of $800,000 and accumulated depreciation of $300,000) for $600,000. On January 1, 2008, the equipment has a remaining useful life of five years and is depreciated using the straight-line method. The marginal income tax rates for both companies are 40% and separate income tax returns are filed. S Company will record a gain of $100,000 on the sale of the equipment and each year P Company will record depreciation that is $20,000 greater than depreciation based on the cost of the equipment to the selling affiliate. Workpaper eliminating entries in the December 31, 2008, and December 31, 2009, consolidated
Slide 7-50

Illustration: Workpaper eliminating entries in the December 31, 2008, and December 31, 2009, consolidated statements workpapers relating to the unrealized profit on the intercompany sale of the equipment are illustrated below:
Slide 7-51

Since the selling affiliate is a partially owned subsidiary (upstream sale), the calculation of the noncontrolling interest in consolidated income requires that the after-tax amount of gain recorded by the subsidiary (.60 x $100,000 = $60,000) be subtracted from the reported net income of the subsidiary and that the after-tax amount of the gain realized through depreciation (.6 x $20,000 = $12,000) be added to the reported net income of the subsidiary before multiplying by the noncontrolling interest percentage. Assuming that S Company reported net income of $144,000 in 2008, the
noncontrolling interest in consolidated income is $28,800 [.30 x

($144,000 - $60,000 + $12,000)].
Slide 7-52

If the sale of equipment is downstream, no adjustments to the reported net income of the subsidiary are necessary in the calculation of the noncontrolling interest in consolidated income.
Slide 7-53
APPENDIX - Impact of Unrealized Intercompany Profit on the Calculation of Deferred Tax Consequences Related To Undistributed Subsidiary Income
Before calculating the deferred tax consequences relating lo undistributed subsidiary income, the amount of undistributed income must be adjusted for the after-tax amount of unrealized
intercompany profit recorded by the subsidiary that has been

recognized in the determination of consolidated income.
Slide 7-54
APPENDIX Calculations (and Allocations) of Consolidated net Income and Consolidated Retained Earnings.
When the affiliated companies file separate income tax returns, the
calculations of consolidated net income and consolidated retained

earnings must be modified to incorporate income tax consequences.
Adjustments must now be made for the after-tax amounts of
unrealized intercompany profit.

Consolidated net income is reduced by the income tax consequence of undistributed income for the current year. Consolidated retained earnings is reduced by the income tax consequence of undistributed income from the date of acquisition to the date of the calculation.
Slide 7-55
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Slide 7-56

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Slide 7-1

Advanced Accounting, Fourth Edition

Intercompany Sales of Nondepreciable Property

property, workpaper entries are necessary to:

affiliated group and in an amount equal to the difference

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

machinery. The estimated useful life of the building and the

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

$ 700,000 400,000 $ 300,000

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Nondepreciable Property

LO 1 Financial reporting objectives nondepreciable property.

Intercompany Sales of Depreciable Property (Machinery, Equipment, and Buildings)

LO 4 Intercompany gain realized through usage.

Intercompany Sales of Depreciable Property (Machinery, Equipment, and Buildings)

LO 2 Financial reporting objectives depreciable property.

Intercompany Sales of Depreciable Property (Machinery, Equipment, and Buildings)

LO 2 Financial reporting objectives depreciable property.

Intercompany Sales of Depreciable Property

LO 6 Subsidiary vs. parent as the seller.

Intercompany Sales of Depreciable Property

LO 6 Subsidiary vs. parent as the seller.

Intercompany Sales of Depreciable Property

Equipment Gain on Sale of Equipment Accumulated Depreciation

280,000 120,000 400,000

LO 6 Subsidiary vs. parent as the seller.

Intercompany Sales of Depreciable Property

Accumulated Depreciation - Equipment Depreciation Expense ($30,000/2)

LO 6 Subsidiary vs. parent as the seller.

Intercompany Sales of Depreciable Property

280,000 96,000 24,000 400,000

LO 7 Computing the noncontrolling interest.

Intercompany Sales of Depreciable Property

30,000 12,000 3,000

LO 7 Computing the noncontrolling interest.

Intercompany Sales of Depreciable Property

280,000 96,000 24,000

LO 7 Computing the noncontrolling interest.

Intercompany Sales of Depreciable Property

Cost or Partial Equity

LO 7 Computing the noncontrolling interest.

Intercompany Sales of Depreciable Property

LO 6 Workpaper entries-upstream sales.

Intercompany Sales of Depreciable Property

1,397,400 627,000 (150,000) 1,874,400

63,000 (4) (15,000) $ 48,000 $

NCI in Consolidated Income = 20% x ($300,000 + $15,000) = $63,000

LO 6 Workpaper entries-upstream sales.

Intercompany Sales of Depreciable Property

525,000 1,218,000 30,000

377,400 312,600 3,000