Intercompany Profit Transactions – Plant Assets

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©2009 Accounting Department, University Of Siliwangi

Intercompany ProfitTransactions – Plant Assets

Iman P. Hidayat

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Intercompany Profits onNondepreciable Plant Assets

Nondepreciable asset

Company P Company S

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A transfer at a price other than bookvalue gives rise to unrealized profitor loss to the consolidated entity.

Any gain or loss on sales downstreamfrom parent to subsidiary is initiallyincluded in parent company income

and must be eliminated.

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The amount of elimination is 100%,regardless of the minority

interest percentage.

Subsidiary accounts include anyprofit or loss from upstream sales.

The parent company recognizes onlyits share of the subsidiary’s income.

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Downstream Sale of Land

Stan is a 90%-owned subsidiary of Park Corporation,acquired for $270,000 on January 1, 2005.

Cost was equal to book value and fair value.

Stan’s net income for 2005: $70,000Park’s income (excluding Stan’s income): $90,000

Park’s income includes a $10,000 unrealized gainfrom sale of land to Stan that cost $40,000.

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Investment in Stan 63,000Income from Stan 63,000

To record 90% of Stan’s reported income

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Cash 50,000Land 40,000Gain 10,000

To record sale of land to StanIncome from Stan 10,000

Investment in Stan 10,000To eliminate unrealized profit on land sold to Stan

0ffset

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Working Papers December 31, 2005

Adjustments/ Consol-Park Stan Eliminations idated

SalesIncome from StanGain on sale of landExpensesMinority interest expense ($70,000 × 10%)Net incomeRetained earnings – ParkRetained earnings – StanAdd: Net incomeRetained earnings 12/31

$380 53 10 (300)

$143 $207

143 $350

$220

(150)

$ 70

$100 70$170

b 53a 10

c 7

d 100

$600

(450)

(7) $143 $207

143 $350

Income Statement

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Other assetsLandInvestment in Stan

LiabilitiesCapital stockRetained earningsMinority interest

$477

323

$800 $ 50 400 350

$800

$350 50

$400$ 30 200 170

$400

a 10b 53d 270

d 200

c 7d 30

$827 40

$867 $ 80 400 350

37 $867

Adjustments/ Consol-Park Stan Eliminations idatedBalance Sheet

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Upstream Sale of Land

Now, assume that Stan sells land to Parkwith a cost of $40,000 for $50,000.

The net incomes for Stan and Park remainthe same, but the unrealized profit on the

sale of land is now reflected in the incomeof Stan, rather than Park.

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Upstream Sale of Land

Income from Stan 9,000Investment in Stan 9,000

To eliminate 90% of the unrealized profiton land purchased from Stan


To record 90% of Stan’s reported net income

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Adjustments/ Consol-Park Stan Eliminations idated

SalesIncome from StanGain on sale of landExpensesMinority interest expense ($70,000 × 10%)Net incomeRetained earnings – ParkRetained earnings – StanAdd: Net incomeRetained earnings 12/31

$390 54 (300)

$144 $207

144 $351

$210

10(150)

$ 70

$100 70$170

b 54a 10

c 6

d 100

$600

(450)

(6) $144 $207

144 $351

Income Statement

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Other assetsLandInvestment in Stan

LiabilitiesCapital stockRetained earningsMinority interest

$427 50 324

$801 $ 50 400 351

$801

$400

$400$ 30 200 170

$400

a 10b 54d 270

d 200

c 6d 30

$827 40

$867 $ 80 400 351

36 $867

Adjustments/ Consol-Park Stan Eliminations idatedBalance Sheet

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Downstream Sale ofDepreciable Plant Assets

Perry, Corporation sells machinery to its80%-owned subsidiary, Soper Corporation,

on December 31, 2003.

Book value: $90,000 – $40,000 = $50,000

Perry sold the machine for $80,000.

What are the journal entries?

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Cash 80,000Accumulated Depreciation 40,000

Machinery 90,000Gain on Sale of Machinery 30,000

To record sale of machine to Soper

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Income from Soper 30,000Investment in Soper 30,000

To offset the unrealized gain

Investment in Soper 6,000Income from Soper 6,000

To partially recognize the gain over five years

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Machinery 80,000Cash 80,000

To record purchase of machine from Perry

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Working Papers Adjustment

Gain on Sale of Machinery 30,000Machinery 30,000

To eliminate gain and adjust machinery

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Sale in Subsequent Year toOutside Entity

Assume that Stan uses the land for threeyears and sells it for $65,000 in 2009.

Stan gain:$65,000 – $50,000 = $15,000

Consolidated entity:$65,000 – $40,000 = $25,000

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To recognize previously deferred profiton sale to Stan

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Cash 65,000Land 50,000Gain 15,000

To record sale of land

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Investment in Stan 10,000Gain on Land 10,000

To adjust gain on land to the $25,000 gainto the consolidated entry

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Upstream Sale of Land:Minority Interest

Stan’s reported net income: $70,000

70,000

$63,000 to Park $7,000 to MI

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Upstream Sale of Land:Minority Interest

Stan’s reported net income: $70,000Unrealized gain: –10,000Realized net income: $60,000

60,000

$54,000 to Park $6,000 to MI

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Consolidated Example

Plank Corporation acquired a 90% interestin Sharp Corporation at its book value of

$450,000 on January 3, 2005.

On July 1, 2005, Plank sold landto Sharp at a gain of $5,000.

During 2007, Sharp sold the land to anoutsider at a loss to Sharp of $1,000.

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On January 2, 2006, Sharp sold equipment with afive-year remaining life to Plank at a gain of $20,000.

Plank still had the equipment on 12/31/2007.

On January 5, 2007, Plank sold a buildingto Sharp at a gain of $32,000.

The remaining useful life on this date was 8 years.

Sharp still owned the building on 12/31/2007.

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Underlying equity in Sharp 12/31/2006 ($600,000 equity of Sharp × 90%) $540,000Less: Unrealized profit on land (5,000)

Unrealized profit on equipment ($16,000 × 90 %) (14,400)

Investment in Sharp 12/31/2006 $520,600

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Investment in Sharp 12/31/2006 $520,600Add: Income from Sharp

($80,000 × 90%) 72,000Gain on land 5,000Piecemeal recognition of gain on equipment 3,600

Deduct: Unrealized profit on building (28,000)Dividends received 2007 (27,000)

Investment in Sharp 12/31/2007 $546,200

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Working Paper Entries

a Investment in Sharp 5,000Gain on Land 5,000

To recognize previously deferred gain on land

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b Investment in Sharp 14,400Minority Interest January 1 1,600Accumulated Depreciation 8,000

Depreciation Expense 4,000Equipment 20,000

To eliminate unrealized profit on upstreamsale of equipment

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c Gain on Buildings 32,000Accumulated Depreciation 4,000

Buildings 32,000Depreciation Expense 4,000

To eliminate unrealized gain on the downstreamsale of buildings

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d Income from Sharp 52,600Dividends 27,000Investment in Sharp 25,600

To eliminate income and dividendfrom subsidiary

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e Minority Interest Expense 8,400Dividends – Sharp 3,000Minority Interest 5,400

To enter minority interest share of subsidiaryincome and dividends

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f Retained Earnings – Sharp 200,000Capital Stock – Sharp 400,000

Investment in Sharp 540,000Minority Interest – Beginning 60,000

To eliminate reciprocal investment andequity balances

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Inventory Items Purchased forUse as Operating Assets

Paco Electronics sells a computer that itmanufactures at a cost of $150,000 to Santana.

The selling price is $200,000.

Santana is Paco’s 100%-owned subsidiary.

The computer has a five-year expected useful live.

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Working Paper Entries:Year of Sale

Sales 200,000Cost of Sales 150,000Equipment 50,000

To eliminate intercompany sales and to reducecost of sales and equipment for the cost andgross profit, respectively

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Working Paper Entries:Year of Sale

Accumulated Depreciation 10,000Depreciation Expense 10,000

To eliminate depreciation on the gross profit fromthe sale ($50,000 ÷ 5)

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Working Paper Entries:Second Year

Investment in Santana 40,000Accumulated Depreciation 20,000

Equipment 50,000Depreciation Expense 10,000

To reduce equipment to its cost basis to the consolidatedentity, to eliminate the effect of the intercompany salefrom depreciation expense and accumulated depreciation,and to establish reciprocity between beginning-of-the-periodequity and investment amounts

Intercompany Profit Transactions – Plant Assets

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