INTERCOMPANY GAIN

TRANSACTIONS PLANT ASSETS

Intercompany gain on sale of

non-depreciable assets
- Common transaction is the sale of land
1.Sale of land at book value
Assume land costing 100,000 was sold by P
Company to its subsidiary S company for the
same amount.
Parent Entries
Cash
100,000
Land 100,000

Subsidiary Entries
Land
100,000
Cash 100,000

Intercompany gain on sale of

non-depreciable assets
- Common transaction is the sale of land
1.Sale of land at book value
Observation:
Land continues to be valued at cost
No gain was recognized
Consolidated net income and balance sheet
would not be misstated

Intercompany gain on sale of

non-depreciable assets
- Common transaction is the sale of land
2.Sale of land above book value
Assume land costing 100,000 was sold by P
Company to its subsidiary S company for
175,000.
Parent Entries

Cash
175,000
Land
100,000
Gain on sale 75,000

Subsidiary Entries

Land
Cash

175,000
175,000

Intercompany gain on sale of

non-depreciable assets
- Common transaction is the sale of land
2.Sale of land above book value
Upon consolidation eliminating entries shall
be performed
Gain on sale
Land

75,000
75,000

Basis:
Entity Concept
Prudence
Asset valuation
1

Intercompany gain on sale of

non-depreciable assets
- Common transaction is the sale of land
2.Sale of land above book value
Assignment of Unrealized Profit Elimination
Sale

Elimination

Downstream
Against controlling interest
Upstream:
Wholly owned subsidiary
Against controlling interest
Partially owned subsidiary Proportionately against
controlling and noncontrolling
interest
1

Intercompany gain on sale of

non-depreciable assets
Illustration: Assume P Company owns 80% of the
common stock of S Company. The companies report
net income from their own operation:
P Company
S Company

500,000
300,000

Downstream Sale
Ps net income from own operations
500,000
Unrealized Intercompany Gain
(75,000)
Ps realized net income
425,000
Ss net income from own operations
300,000
Consolidated net income
725,000
Attributable to NCI (300,000 x 20%)
(60,000)
Attributable to parent (controlling interest) 665,000
2

Intercompany gain on sale of

non-depreciable assets
Illustration: Assume P Company owns 80% of the
common stock of S Company. The companies report
net income from their own operation:
P Company
S Company

500,000
300,000

Upstream Sale
Ps net income from own operations
500,000
Ss net income from own operations 300,000
Unrealized Intercompany Gain
(75,000)
225,000
Consolidated net income
725,000
Attributable to NCI (225,000 x 20%)
(45,000)
Attributable to parent (controlling interest)
680,000

Intercompany gain on sale of

non-depreciable assets
Subsequent Disposition of asset
-unrealized intercompany gain is viewed as being realized at the
time the assets are resold to outsiders
Continuing the illustration, the land was sold to outsiders
for 225,000.
Downstream Sale

Upstream Sale

Elimination Entries

Elimination Entries

Cash

225,000
Land
175,000
Gain on sale 50,000

Retained Earnings, January 75,000

Gain on sale
75,000

Cash

225,000
Land
175,000
Gain on sale 50,000

Retained Earnings, January 60,000

NCI
15,000
Gain on sale
75,000

Intercompany gain on sale of

non-depreciable assets
Subsequent Disposition of asset

The companies report net income from their own operation:

P Company
500,000
S Company
300,000
Downstream Sale
Ps net income from own operations
500,000
Realized Intercompany Gain
75,000
Ps realized net income
575,000
Ss net income from own operations
300,000
Consolidated net income
875,000
Attributable to NCI (300,000 x 20%)
(60,000)
Attributable to parent (controlling interest)
815,000
Upstream Sale
Ps net income from own operations
500,000
Ss net income from own operations
300,000
Realized Intercompany Gain
75,000
375,000
Consolidated net income
875,000
Attributable to NCI (375,000 x 20%)
(75,000)
Attributable to parent (controlling interest)
800,000

Intercompany gain on sale of

non-depreciable assets
Observation
1. Eliminating entry is only required when intercompany
sale of non-depreciable asset results to a gain
2. Upstream sale from a partially owned subsidiary
affects both controlling interest and non-controlling
interest.
3. Unrealized gain becomes realized upon sale of the
asset to an outside entity

Intercompany gain on sale of depreciable

assets
-Unrealized intercompany gains on a depreciable asset are viewed
as being realized gradually over the remaining life of the asset
as it is used by the purchasing affiliate.
Downstream Sale

Asset is overstated, Balance

sheet is overstated

Cash
70,000
Equipment 70,000
Equipment
50,000
Cash
70,000
Gain on Sale
20,000
Dep. Exp
7,000
Acc. Dep. 7,000
Expense is overstated,
Income is understated

Intercompany gain on sale of depreciable

assets
Illustration: Assume on Dec. 31, 200A P sells equipment to S, its subsidiary
for 70,000, it originally costs 90,000 when purchased 3 years ago and is
depreciated over a total life of 10 years using the straight line method of
depreciation with no residual value. . P owns 80% of S outstanding shares.
Original Cost 90,000
Acc. Dep.
Annual Dep. 9000
No. of years x 3
Book Value 63,000

Sales Price
Book Value
Gain on sale

70,000
(63,000)
7,000

27,000

P Company entries
Cash
70,000
Acc. Dep.
27,000
Equipment
90,000
Gain on sale
7,000

S Company entries
Equipment 70,000
Cash
70,000

All dividends received by P Company are from S Company.

3

1.Dividend Income 24,000

NCI
6,000

Dividends declared S Co. 30,000

2.NCI in net Income of S CO. 10,000

NCI
10,000

3.Common Stock 200,000

RE
100,000
Inv. In S Co.
240,000
NCI
60,00
4.Machinery & Equip.
Gain on Sale
Acc. Dep.

20,000
7,000
27,000

Consolidated Net Income-200A

Ps net income from own operations (P171,000-24,000)
147,000
Unrealized gain on sale of equipment (downstream sale)
( 7,000)
Ps realized net income
140,000
S net income from own operations
50,000
Consolidated net income
190,000
Attributable to NCI (50,000 x 20%)
( 10,000)
Attributable to parent (Controlling Interest)
180,000

Consolidated Retained Earnings-200A

Retained earnings, December 31,2010- P
411,000
Unrealized gain on sale of equipment (downstream sale)
( 7,000)
Realized Retained Earnings, December 31
404,000
Add: Ps
share
in undistributed income of S
16,000
Share
in S
net income
(50,000
30,000) x 80%
S net
income
50,000
P Co.s proportionate share *
80%
40,000
Less: Dividend received
(24,000)
Consolidated retained earnings, December 31,2010

420,000

The NCI of 64,000 may be verified by the following

computations:
NCI
Net beg.
assets (S/E), 1/1/201060,000
S Company
300,000
Share
in net
income (50,000 30,000)
10,000
Increase
in earnings
20,000
NCI
(6,000)
Net Dividend
assets, 12/31/10 S Company
320,000
NCI (320,000 x 20%)

64,000

Intercompany gain on sale of depreciable

assets
Separate Company Entries 200B
Books of S Company
During 200B, S will begin depreciating the P70,000 cost of the equipment
purchased from P over its remaining life of seven (7) years using the
straight line method. The depreciation of P10,000 per year (70,000/7
years) is recorded as follows by S:
Depreciation expense
10,000
Accumulated Depreciation
10,000
To record depreciation for 2011.
P Co. received dividend of 32,000 from S Co.

1.Dividend Income 32,000

NCI
8,000
Dividends declared S Co.

40,000

2.NCI in net Income of S CO. 14,800

NCI
14,800
3.Common Stock 200,000
RE
100,000
Inv. In S Co.
240,000
NCI
60,00
4.R E-S Company Jan 1
NCI

4,000
4,000

5. Machinery & Equip.

RE-P Co.
Acc. Dep.

20,000
7,000
27,000

6. Acc. Dep.
1,000
Depreciation Exp.
Depreciation recorded by S
10,000
Should be depreciation
(9,000)
Overstatement (realized gain)
1,000

7. R.E-S Company, Jan 1

R.E-P Company, Jan 1

1,000
16,000
16,000

Consolidated Net Income-200B

Ps net income from own operations (P191,000-32,000)
159,000
Realized gain on sale of equipment (downstream sale)
1,000
Ps realized net income
160,000
S net income from own operations
74,000
Consolidated net income
234,000
Attributable to NCI (74,000 x 20%)
( 14,800)
Attributable to parent (Controlling Interest)
219,200

Consolidated Retained Earnings-200B

Retained earnings, December 31,2010- P
542,000
Unrealized gain on sale of equipment (7000-1000)
( 6,000)
P Co.s share in undistributed prior year earnings
16,000
Realized Retained Earnings, December 31
552,000
Add: Ps
in undistributed income of S
27,200
Share
in Sshare
net income
(74,000
40,000) x 80%
S net
income
74,000
P Co.s proportionate share * 80%
59,200
Less: Dividend received
(32,000)
Consolidated retained earnings, December 31,2010

579,200

The NCI of 70,800 may be verified by the following

computations:
NCI
Net beg.
assets (S/E), 1/1/200B64,000
S Company
320,000
Share
in
net
income
14,800
Increase in earnings (74,000 40,000)
34,000
NCI
Dividend
(8,000)
Net assets, 12/31/B S Company
354,000
NCI (354,000 x 20%)

70,800

Intercompany gain on sale of depreciable

assets
Observation on Downstream sale of depreciable asset
1. Unrealized gain(loss) shall be fully charged against
the parent.
2. Unrealized gain(loss) will be gradually realized
through the passage of time, when the Subsidiary
benefited upon the use of the asset.
3. Realized gain(loss) is the difference between the
should have been depreciation and the depreciation
recorded by the parent.
4. To eliminate unrealized gain(loss) in the subsequent
period retained earnings of the parent shall be used.

Consolidation in Subsequent Years

Basically consolidation in the subsequent years is the same as the
consolidation in the next year after the sale ( as shown in the preceding
example). Elimination procedures would include:
1. Restating the asset sold and its accumulated depreciation.
2. Eliminating excess or adding lacking depreciation.
3. Reducing beginning retained earnings by the amount of the unrealized
gain or loss at the beginning of the year.
Machinery and Equipment
20,000
RE, Jan. 1
6,000
Acc. Dep.
26,000

Book Value on consolidated FS

90,000
Book Value on S books
(70,000)
Understatement
20,000

Consolidation in Subsequent Years

Basically consolidation in the subsequent years is the same as the
consolidation in the next year after the sale ( as shown in the preceding
example). Elimination procedures would include:
1. Restating the asset sold and its accumulated depreciation.
2. Eliminating excess or adding lacking depreciation.
3. Reducing beginning retained earnings by the amount of the unrealized
gain or loss at the beginning of the year.
Machinery and Equipment
20,000
RE, Jan. 1
6,000
Acc. Dep.
26,000
Unrealized gain on sale 200A
7,000
Realized gain, 200B
(1,000)
Unrealized gain on sale, Jan. 1 200C 6,000

Consolidation in Subsequent Years

Basically consolidation in the subsequent years is the same as the
consolidation in the next year after the sale ( as shown in the preceding
example). Elimination procedures would include:
1. Restating the asset sold and its accumulated depreciation.
2. Eliminating excess or adding lacking depreciation.
3. Reducing beginning retained earnings by the amount of the unrealized
gain or loss at the beginning of the year.
Machinery and Equipment
20,000
RE, Jan. 1
6,000
Acc. Dep.
26,000
Acc. Dep. Base on consolidated FS
[(90,000/10)*4] 36,000
Acc. Dep. Base on S books
[(70,000/7)*1] (10,000)
Understatement
26,000

Dec.31,200B
Dec.31,200B

Consolidation in Subsequent Years

Basically consolidation in the subsequent years is the same as the
consolidation in the next year after the sale ( as shown in the preceding
example). Elimination procedures would include:
1. Restating the asset sold and its accumulated depreciation.
2. Eliminating excess or adding lacking depreciation.
3. Reducing beginning retained earnings by the amount of the unrealized
gain or loss at the beginning of the year.
Machinery and Equipment
20,000
RE, Jan. 1
6,000
Acc. Dep.
26,000
Acc. Dep.
1,000
Depreciation 1,000

Depreciation recorded by S
10,000
Should be depreciation
(9,000)
Overstatement (realized gain)
1,000

Consolidation in Subsequent Years

Change in estimated useful life of Asset Upon Intercompany Sale
-The new useful life will be the basis for depreciation both by the purchasing affiliate and
for the purpose of preparing consolidated financial statement

To continue the illustration assume on 200C it was known that the correct remaining life of
the asset was 3 years.

Machinery and Equipment

20,000
RE, Jan. 1
6,000
Acc. Dep.
26,000
Acc. Dep.
2,000
Depreciation 2,000
Depreciation recorded by S
Dec.31,200C [(70,000-10,000)/3]
20,000
Should be depreciation
Dec.31,200C [(90,00036,000)/3]
(18,000)
Overstatement
2,000

Intercompany gain on sale of depreciable

assets
-Unrealized intercompany gains on a depreciable asset are viewed
as being realized gradually over the remaining life of the asset
as it is used by the purchasing affiliate.
Upstream Sale

Asset is overstated, Balance

sheet is overstated

Cash
70,000
Equipment 70,000
Equipment
50,000
Cash
70,000
Gain on Sale
20,000
Dep. Exp
7,000
Gain on sale will appear on the income
statement of subsidiary, part of Acc.
it will Dep. 7,000
pertain to the parent company while part will
go to NCI

Expense is overstated,
Income is understated
3

Intercompany gain on sale of depreciable

assets
Illustration: Assume on Dec 31, 200A S sells equipment to P, its
parent for 70,000, it originally costs 90,000 when purchased 3
years ago and is depreciated over a total life of 10 years using the
straight line method of depreciation with no residual value. P owns
80% of S outstanding shares.
Sales Price
70,000
Original Cost 90,000
Acc. Dep.
Annual Dep. 9000
No. of years x 3
27,000
Book Value 63,000
S Company entries
Cash
70,000
Acc. Dep.
27,000
Equipment
90,000
Gain on sale
7,000

Book Value
Gain on sale

(63,000)
7,000

P Company entries
Equipment 70,000
Cash
70,000

All dividends received by P Company are from S Company.

3

1.Dividend Income 24,000

NCI
6,000

Dividends declared S Co. 30,000

S Income
57,000
Less: unrealized gain
(7,000)
Realized Income 50,000
NCI share
* 20%
Share in net income
10,000

2.NCI in net Income of S CO. 10,000

NCI
10,000

3.Common Stock 200,000

RE
100,000
Inv. In S Co.
240,000
NCI
60,00
4.Machinery & Equip.
Gain on Sale
Acc. Dep.

20,000
7,000
27,000

Consolidated Net Income-200A

Ps net income from own operations (P164,000-24,000)
140,000
Ss realized net income from own operations
Net income
57,000
Unrealized gain (downstream sale) ( 7,000)
50,000
Consolidated net income
190,000
Attributable to NCI (50,000 x 20%)
( 10,000)
Attributable to parent (Controlling Interest)
180,000

Consolidated Retained Earnings-200A

Retained earnings, December 31,200A- P
404,000
Add: Ps share in undistributed adjusted income of S
Share in S adjusted net income
Undistributed Income(57,000-30,000)
27,000
S adjusted net income (57,000-7,000)
50,000
Unrealized upstream sale
(7,000)
P Co.s proportionate share
*
80%
40,000
Realized increase in earnings
20,000
Less: Dividend received
(24,000)
P Co.s proportionate share
80%
16,000
Consolidated retained earnings, December 31,2010
420,000

The NCI of 64,000 may be verified by the following

computations:
NCI beg.
60,000
Net assets (S/E), 1/1/200A S Company 300,000
Share in net income
Increase in undistributed earnings
Net income
57,000
Net income
57,000
Unrealized gain
( 7,000)
Unrealized gain
( 7,000)
50,000 * 20% 10,000
Dividends paid
( 30,000)
20,000
NCI Dividend
(6,000)
Net assets, 12/31/10 S Company
320,000
NCI (320,000 x 20%)

64,000

Intercompany gain on sale of depreciable

assets
Separate Company Entries 200B
Books of S Company
During 200B, P will begin depreciating the P70,000 cost of the equipment
purchased from S over its remaining life of seven (7) years using the
straight line method. The depreciation of P10,000 per year (70,000/7
years) is recorded as follows by P:
Depreciation expense
10,000
Accumulated Depreciation
10,000
To record depreciation for 2011.
P Co. received dividend of 32,000 from S Co.

S net Income
75,900
Realized Gain
1,000
Realized net income
76,900
NCI share
*20%
NCI share in net income of S
15,380

1.Dividend Income 32,000

NCI
8,000
Dividends declared S Co.

40,000

2.NCI in net Income of S CO. 15,380

NCI
15,380
3.Common Stock 200,000
RE
100,000
Inv. In S Co.
240,000
NCI
60,000
4.R E-S Company Jan 1
NCI

5,400
5,400

5. Machinery & Equip.

20,000
RE-P Co.
5,600
NCI
1,400
Acc. Dep.
27,000

Depreciation recorded by S
10,000
Should be depreciation
(9,000)
Overstatement (realized gain)
1,000

6. Acc. Dep.
1,000
Depreciation Exp.
6. R.E-S
R.E -P

1,000

21,600
21,600

Consolidated Net Income-200B

Ps net income from own operations (P191,000-32,000)
159,000
Ss realized net income from own operations
Net income
75,900
realized gain (downstream sale)
1,000
76,900
Consolidated net income
235,900
Attributable to NCI (76,900 x 20%)
( 15,380)
Attributable to parent (Controlling Interest)
220,520

Consolidated Retained Earnings-200B

Consolidated R.E. beginning
420,000
Consolidated Net Income
220,500
Dividends declared- P. Co.
( 60,000)
Consolidated R.E end
580,250

The NCI of 71,380 may be verified by the following

computations:
Net beg.
assets (S/E), 1/1/200B64,000
S Company
320,000
NCI
Increase
in undistributed
earnings
Share
in net
income
Net income
income
75,900
Net
75,900
realizedgain
gain
1,000
realized
1,000)
Dividends 76,900
paid
*( 40,000)
20% 15,38036,900
Net Dividend
assets, 12/31/10 S Company
356,900
NCI
(8,000)
NCI (356,900 x 20%)

71,380

Intercompany gain on sale of depreciable

assets
Observation on Upstream sale of depreciable asset
1. Unrealized gain(loss) shall be shared between the
parent and the NCI.
2. Unrealized gain(loss) will be gradually realized through
the passage of time, when the Subsidiary benefited
upon the use of the asset.
3. Realized gain(loss) is the difference between the
should have been depreciation and the depreciation
recorded by the parent.
4. To eliminate unrealized gain(loss) in the subsequent
period retained earnings of the parent and NCI shall be
used.
3

Intercompany Sale of Plant Assets

Equity Method
Basis for consolidation:
1. Cost method (required by PAS 27)
2. Equity Method (Investment in Associate)
-Dividends will be recorded as a reduction to the
investment account.
-Share in realized net income shall be recognized.
-Changes in fair value is not recognized.

Intercompany Sale of Plant Assets

Equity Method
Illustration:
Assume S sell equipment to P for P70, 000
on Dec. 31, 200A. The original cost and
accumulated
depreciation
of
the
equipment are P90, 000 and P27, 000. The
remaining life of the equipment is seven
years. On Dec. 31, 200A, S reports net
income of P57,000, including the P7,000
gain on sale of the equipment. Both
company uses the straight-line method of
depreciation. S declared dividends of
30,000. P owns 240,000 as investment in S
Co. stocks.

Intercompany Sale of Plant Assets

Equity Method
Separate Company Entries 200A
Books of S Company 200A
Dec. 31, 200A
Depreciation 9, 000
Accumulated Depreciation 9, 000
To record 2010 depreciation based on original cost.
Cash 70, 000
Accumulated Depreciation 27, 000
Equipment
90, 000
Gain on sale of equipment 7, 000
To record sale of equipment.

Intercompany Sale of Plant Assets

Equity Method

Books of P Corporation
Dec. 31, 200A
Equipment
70, 000
Cash
70, 000
To record purchase of equipment.

Intercompany Sale of Plant Assets

Equity Method
Equity Method Entries 200A
Cash 24, 000
Investment in S Company stock 24, 000
To record dividends from S (P30, 000 x 80%)
Investment in S Company stock
45, 600
Investment income 45, 600
To record equity-method income (P57, 000 x 80%)
Investment income 5,600
Investment in S Company stock
5, 600
To remove unrealized gain on sale of equipment (P7, 000 x 80%)

Intercompany Sale of Plant Assets

Equity Method
Original acquisition cost of S Companys stock
P240, 000
Ps proportionate share of Ss income (P57, 000 x 80%)
45, 600
Ps s share of Ss dividends (P30, 000 x 80%)
(24, 600)
Ps share of unrealized gain (P7, 000 x 80%)
(5, 600)
Balance of investment account, De. 31, 2010
P
256, 000

Intercompany Sale of Plant Assets

Equity Method

Working Paper Elimination Entries

200A
Investment income
40, 000
Dividends declared
24, 000
Investment in S Company stock
16, 000
To eliminate investment income.
NCI in net income of subsidiary
10, 000
Dividends declared
6, 000
NCI
4, 000
To assign income to NCI (P57, 000 P 7, 000) x 20%

Intercompany Sale of Plant Assets

Equity Method
Common stock S
200, 000
Retained earnings, Jan. 1 S 100, 000
Investment in S Company stock
240, 000
NCI
6, 000
To eliminate Ss equity accounts against investment
account and NCI at the beginning of year.
Machinery and equipment
20, 000
Gain on sale of equipment
7, 000
Accumulated depreciation
To eliminate gain on sale of equipment.

27, 000

Intercompany Sale of Plant Assets

Equity Method
Continuing the illustration S declared 40,000 of dividends on 200B. S
earned 75,900 for the period
Equity-Method Entries 200B
Depreciation
10, 000
Accumulated depreciation 10, 000
To record depreciation (P70, 000/ 7 years)
Cash
32, 000
Investment in S Company stock 32, 000
To record dividends from S (P40, 000 x 80%)
Investment in S Company stock 60, 720
Investment income 60, 720
To record equity-method income (P75, 900 x 80%)
Investment in S Company stock 800
Investment income 800
To recognize portion of gain on sale of equipment. (P1, 000 x 80%)

Intercompany Sale of Plant Assets

Equity Method
Working Paper Elimination Entries 200B
Investment income 61,520
Dividends declared 32, 000
Investment in S Company stock 29, 520
To eliminate investment income.
NCI in net income of subsidiary
15, 380
Dividends declared 8, 000
NCI
7,380
To assign income to NCI (P75,900 + P 1, 000) x 20%
Common stock S 200, 000
Retained earnings, Jan. 1 S 127, 000
Investment in S Company stock
261,600
NCI
65, 400
To eliminate Ss equity accounts against investment
account and NCI at the beginning of year.

Intercompany Sale of Plant Assets

Equity Method
Machinery and equipment
20, 000
Investment in S Co. stock
5, 600
NCI
1,400
Accumulated depreciation
27, 000
To eliminate unrealized gain on upstream sale.
Accumulated Depreciation
1,000
Depreciation Expense
1,000
To record excess depreciation (realized gain)