Intercompany transfer of non-current assets

1. Intercompany Profit
Transaction:
Non-current Assets
(Part 1)
ARTHIK DAVIANTI

2. Understand and explain
concepts associated with
transfers of long-term assets
and services.

3. Summary of GAAP Requirements for Preparing
Consolidated Statements
All intercompany transactions must be eliminated
in consolidation.
The full amount of unrealized intercompany profit
or gain must be eliminated.
The deferral is shared with NCI shareholders in
upstream transactions.

4. Big Picture:
The Consolidated Perspective
From a consolidated viewpoint, the
reported amount for a fixed asset
cannot change merely because the
asset has been moved to a different
location within the consolidated
group.
Objective:
 Undo the transfer.
 Make it appear as if we only
changed the estimated useful life
of asset.
P
S
Long-term
Asset

5. Different Asset Types
1. Non-depreciable Assets
• The transfer of non-depreciable assets is very
similar to the transfer of inventory
• Eliminate gains like unrealized gross profit
2. Depreciable Assets
• Eliminate the seller’s gain
• Adjust transferred asset back to old basis
• Adjust depreciation back to what it would have
otherwise been if the original owner had
depreciated the asset based on the revised
estimate of useful life

6. Intercompany Transfers of Services
When one company purchases services from a
related company, the purchaser typically records an
expense and the seller records a revenue.
• In the consolidation worksheet, an eliminating
entry would be needed to reduce both revenue
(debit) and expense (credit).
• Because the revenue and expense are equal and
both are eliminated, income is unaffected by the
elimination.
• The elimination is still important because
otherwise both revenues and expenses are
overstated.

7. Illustration (Baker et al. 2011, p. 307-309)
Intercompany sale process of land.
A series of transaction: (1) land purchased by Parent
company from an unrelated party, (2) land sold to a
subsidiary of Parent Company, and (3) land sold by
subsidiary to an unrelated party:
Details of transactions:
T1 – purchase by Parent Company from an outsider for
$10,000
T2 – Sale from Parent Company to Subsidiary for $15,000
T3 – Sale from Subsidiary to an outsider for $25,000
The amount of gain reported by each company and by
the consolidated entity in a periods depends on the
transactions occur during a period.

8. Illustration (continue)
Case A
All three transactions are completed in the same accounting
period.
Case B
Only transaction T1 is completed during the current period.
Parent Company $ 5,000 ($15,000 - $10,000)
Subsidiary Corporation 10,000 (25,000 - $15,000)
Consolidated Entity 15,000 ($25,000 - $10,000)
Parent Company $ 0
Subsidiary Corporation 0
Consolidated Entity 0

9. Illustration (continue)
Case C
Transaction T1 and T2 are completed during the current
period.
Case D
Only transaction T3 is completed during the current period,
T1 and T2 occurred in a prior period.
Parent Company $ 5,000 ($15,000 - $10,000)
Subsidiary Corporation 0
Consolidated Entity 0
Parent Company $ 0
Subsidiary Corporation 10,000 (25,000 - $15,000)
Consolidated Entity 15,000 ($25,000 - $10,000)

10. Prepare equity-method journal
entries and elimination entries for
the consolidation of a subsidiary
following an intercompany land
transfer.

11. Intercompany Land Transfers
• If land is transferred between related companies at
book value – no adjustment or elimination needed in
consolidating financial statements.
• Because there is no gain or loss, both income and
assets are stated correctly in the consolidation.
• Special treatment is needed if land transfer is more or
less then book value – elimination of gain or loss.
• There should be no gain or loss from related
companies reported in the consolidated financial
statements – until land is sold to other party.

12. Illustration (p. 310 - 311)
Peerless Products Corporation acquires land for $20,000
on January 1, 20X1, and sells the land to its subsidiary,
Special Food Incorporated, on July 1, 20X1, for $35,000
Peerless
Product
Special
Foods
$20 $35
Jan 1, 20X1 Jul 1, 20X1
Purchase
land
Inter-
corporate
transfer of
land
Consolidated Entity

13. Illustration (continues)
Peerless records:
January 1, 20X1
(1) Land 20,000
Cash 20,000
Record land purchase
July 1, 20X1
(2) Cash 35,000
Land 35,000
Record on Sale of land to Special Food

14. Illustration (continues)
Special Foods records
Eliminating entry
July 1, 20X1
(3) Land 35,000
Cash 35,000
Record land purchase
July 1, 20X1
(4) Income from Special Foods 15,000
Investment in Special Food 15,000
Defer gain on intercompany land sale to Special Foods
Gain on Sale of Land 15,000
Land 15,000

15. Assignment of
Unrealized Profit Elimination
Unrealized intercompany gains and losses must be
eliminated in consolidating financial statements –
regardless parent’s ownership of a subsidiary.
Sale Elimination
Downstream (parent to subsidiary) Against controlling interest
Upstream (subsidiary to parent)
Wholly owned subsidiary Against controlling interest
Majority-owned subsidiary Proportionately against controlling
and noncontrolling interests

16. Illustration
Purity Company owns 75% of the common stock of
Southern Corp.
Purity reports operating income (excluding any
investment income from Southern) of $100,000
Southern reports net income of $60,000, included the
income of selling affiliate is an unrealized gain of $10,000
from the intercompany transfer of asset.

17. Illustration (continues)
• If the sale is a downstream transfer, all unrealized profit
is to be eliminated from the controlling interest.
• Consolidated net income (computed and allocated):
Purity’s separate income $100,000
Less: Unrealized intercompany gain on downstream asset sale (10,000)
Purity’s separate realized income $90,000
Southern’s net income 60,000
Consolidated net income $150,000
Income to noncontrolling interest ($60,000 x 0.25) (15,000)
Income to controlling interest $135,000

18. Illustration (continues)
• In the intercompany transfer is from subsidiary to
parent, the unrealized profit on the upstream sale is
eliminated proportionately from both the controlling
and noncontrolling shareholders.
• Consolidated net income (computed and allocated):
Purity’s separate income $100,000
Southern’s net income $60,000
Less: Unrealized intercompany gain on downstream
asset sale (10,000)
Southern’s realized net income 50,000
Consolidated net income $150,000
Income to noncontrolling interest ($50,000 x 0.25) (12,500)
Income to controlling interest $137,500

19. Illustration (continues)
NCI’s proportionate share of the subsidiary’s income
realized in transaction with parties to the consolidated
entity.
Income assigned to the NCI in downstream example.
Southern’s net income $60,000
Less: Unrealized (10,000)
Southern's realized net income $50,000
Proportionate share to noncontrolling interest X 0.25
Income assigned to noncontrolling interest $12,500
Income assigned to the NCI in upstream example.
Southern’s net income $60,000
Proportionate share to noncontrolling interest X 0.25
Southern's realized net income $15,000

20. Downstream Sale of Land
• Peerless Products purchases 80% of the common
stock of Special Foods on Dec 31, 20X0, on its book
value of $240,000. The fair value of Special Foods
NCI is equal to its nook value of $60,000.
• During 20X1, Peerless reports separate income of
$140,000 and declares dividends of $60,000.
• Special Foods reports net income of $50,000 and
declares dividend of $30,000.
• July 1, 20X1, Peerless sells land to Special Foods for
$35,000, which was purchased on Jan 1, 20X1, for
$20,000, resulting an unrealized gain of $15,000.
• Special Foods holds the land until the following
years.
P
S
NCI
20%
80%

21. Fully adjusted equity-method entries – 20X1
20X1 Peerless records its share of Special Foods’ income and
dividend.
(5) Investment in Special Foods 40,000
Income from Special Foods 40,000
Record Peerless’ 80% share of Special Foods’ 20X1 income
(6) Cash 24,000
Investment in Special Foods 24,000
Record Peerless’ 80% share of Special Foods’ 20X1 dividend

22. Under the fully adjusted equity method, Peerless defers the
entire $15,000 using the following entry:
Objectives:
(1) Peerless income is overstated by $15,000, the
adjustment to Income from Special Foods offsets this
overstatement – Peerless net income is now correct, and
(2) Special Foods’ land account is currently overstated by
$15,000 (was recorded for $20,000 but purchased for
$35,000), reduction on the investment account offsets
the overstatement and defer the unrealized gain.
(7) Income from Special Foods 15,000
Investment in Special Foods 15,000
Defer gain on intercompany land sale to Special Foods
Fully adjusted equity-method entries – 20X1

23. Book Value Calculations
Investment
Account Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 60,000 240,000 200,000 100,000
+ Net income 10,000 40,000 50,000
- Dividend (6,000) (24,000) (30,000)
Ending book value 64,000 256,000 200,000 120,000
=
Elimination entries for consolidation worksheet:
Consolidation Worksheet – 20X1

24. Basic investment account elimination entry:
Common Stock 200,000
Retained Earnings 100,000
Income from Special Foods 25,000
NCI in NI of Special Foods 10,000
Dividends Declared 30,000
Investment in Special Foods 241,000
NCI in NA of Special Foods 64,000
The amounts in the Income from Special Foods and
Investment in Special Foods are reduced by the $15,000
gain deferral (worksheet, Baker p. 316).
Consolidation Worksheet – 20X1
Eliminate gain on sale of land to special Food
Gain on Sale of Land 15,000
Land 15,000

25. Consolidation Worksheet—20X1
Adjustments
Parent Sub DR CR Consolidated
Income Statement
Gain on Sale 15,000 15,000 0
Income from Sub 25,000 25,000
Basic
0
Balance Sheet
Investment in Sub 241,000 241,000
Basic
0
Land 155,000 75,000 15,000 215,000
(worksheet, Baker p. 316).

26. Consolidated Net Income
The 20X1 consolidated net income is computed and
allocated as follows:
Peerless’ separate income $155,000
Less: Unrealized intercompany gain on downstream land sale (15,000)
Peerless’ separate realized income $140,000
Special Foods’ net income 50,000
Consolidate net income, 20X1 $190,000
Income to noncontrolling interest ($50,000 X 0.20) (10,000)
Income to controlling interest $180,000

27. Noncontrolling Interest
Special Foods’ net income for 20X1 is $50,000, and the
noncontrolling stockholders’ ownership interest is 20%.
The income of $10,000 ($50,000 X 0.20) is allocated to
the noncontrolling interest.
Noncontrolling interest on December 31, 20X1, is equal
to a proportionate share of Special Foods’ book value:
Book value of Special Foods, December 31, 20X1:
Common stock $200,000
Retained earnings 120,000
Total book value $230,000
Noncontrolling stockholders’ proportionate share X 0.20
Noncontrolling interest, December 31, 20X1 $64,000

28. Prepare equity-method journal
entries and elimination entries for
the consolidation of a subsidiary
following an upstream land
transfer.

29. Upstream Sale of Land
• Peerless Products purchases 80% of the common
stock of Special Foods on Dec 31, 20X0, on its book
value of $240,000. The fair value of Special Foods
NCI is equal to its nook value of $60,000.
• During 20X1, Peerless reports separate income of
$140,000 and declares dividends of $60,000.
• Special Foods reports net income of $50,000 and
declares dividend of $30,000.
• July 1, 20X1, Special Foods sells land to Peerless for
$35,000, which was purchased on Jan 1, 20X1, for
$20,000, resulting an unrealized gain of $15,000.
• Special Foods holds the land until the following
years.
P
S
NCI
20%
80%
Requirement: Peerless’ entry on 20X1 and deferral entry for sold
land.

30. Illustration (p. 318 - 321)
Peerless Products Corporation acquires land for $20,000
on January 1, 20X1, and sells the land to its subsidiary,
Special Food Incorporated, on July 1, 20X1, for $35,000.
Peerless
Product
Special
Foods
Jan 1, 20X1Jul 1, 20X1
Purchase
land
Inter-
corporate
transfer of
land
Consolidated Entity
$35 $20

31. In this this case, Special Foods recognizes a $15,000 gain
from selling the land Peerless in addition to the $50,000 of
income earned from its regular operations.
Special Food’s net income for 20X1 is $65,000. Peerless’
separate income is $140,000.
(8) Investment in Special Foods 52,000
Income from Special Foods 52,000
Record Peerless’ 80% share of Special Foods’ 20X1 income
(9) Cash 24,000
Investment in Special Foods 24,000
Record Peerless’ 80% share of Special Foods’ 20X1 dividend
Fully adjusted equity-method entries – 20X1

32. Under the fully adjusted equity method, Peerless Inc. defers
relative share of the unrealized gross profit is $12,000
(15,000 X 0.80)
Until resold to external party by Special Food, the carrying
value of land must be reduces each time consolidated
statements are prepared
(10) Income from special Foods 12,000
Investment in Special Foods 12,000
Eliminate unrealized gain on the sale of land to Special Foods
Fully adjusted equity-method entries – 20X1

33. Partially Owned Upstream Sales Equity Method
Adjustment
Similar to what we did with inventory
transfers: we must share deferral with the NCI
shareholders
Simply split up the adjustment for unrealized
gains proportionately.
Unreal. 3,000 Gain To NCI Shareholders
P
S
NCI
20%
80%
Equity Method
Adjustments
Investment in
Special Foods
12,000
Income from
Special Foods
12,000Defer Gain
NI 52,000 52,000 NI
40,000

34. Book Value Calculations
Investment
Account Common Retained
NCI (20%) (80%) Stock Earnings
Original book value 60,000 240,000 200,000 100,000
+ Net income 13,000 52,000 65,000
- Dividend (6,000) (24,000) (30,000)
Ending book value 67,000 268,000 200,000 135,000
=
The amount in Peerless’ Income from Special Foods and
Investment in Special Foods accounts by Peerless’ share of the
deferral, $12,000 ($15,000 X 0.80).
Reduce the NCI in Net Income of Special Foods and NCI in Net
Assets of Special Foods by the NCI’s share of the deferral, $3,000
($15,000 X 0.020)
Consolidation Worksheet – 20X1

35. Basic investment account elimination entry:
Common Stock 200,000
Retained Earnings 100,000
Income from Special Foods 40,000
NCI in NI of Special Foods 10,000
Dividends Declared 30,000
Investment in Special Foods 256,000
NCI in NA of Special Foods 64,000
Consolidation Worksheet – 20X1
Eliminate gain on sale of land to special Food
Gain on Sale of Land 15,000
Land 15,000

36. Consolidation Worksheet—20X1
Adjustments
Parent Sub DR CR Consolidated
Income Statement
Gain on Sale 15,000 15,000 0
Income from Sub 40,000 40,000
Basic
0
Balance Sheet
Investment in Sub 241,000 256,000
Basic
0
Land 155,000 75,000 15,000 215,000
(worksheet, Baker p. 319).

37. Consolidated Net Income
The 20X1 consolidated net income is computed and
allocated as follows:
Peerless’ separate income $140,000
Special Foods’ net income $65,000
Less: Unrealized intercompany gain on upstream
land sale (15,000)
Special Foods’ net income 50,000
Consolidate net income, 20X1 $190,000
Income to noncontrolling interest ($50,000 X 0.20) (10,000)
Income to controlling interest $180,000

38. Noncontrolling Interest
The income assigned to the noncontrolling
shareholders is computed as their proportionate share
of the realized income of Special Foods, as follows:
Peerless’ separate income $140,000
Less: Unrealized intercompany gain on upstream land sale (15,000)
Special Foods’ net income 50,000
Proportionate share to noncontrolling interest $190,000
X 0.20
Income to noncontrolling interest $10,000

39. Noncontrolling Interest
On December 31, 20X1, the noncontrolling interest
totals $64,000, computed as follows:
Book value of Special Foods, December 31, 20X1:
Common stock $200,000
Retained earnings 135,000
Total book value $335,000
Unrealized intercompany gain on upstream land sale (15,000)
Noncontrolling stockholders’ proportionate share $320,000
Noncontrolling stockholders’ proportionate share X 0.20
Noncontrolling interest, December 31, 20X1 $64,000

40. Each period after sale while the asset is held by the purchasing
affiliate are adjusted to remove the effects of the unrealized gain
or loss. In the example the following eliminating entry is needed
in the consolidated worksheet each time a consolidated balance
sheet is prepared (downstream):
Eliminating the Unrealized Gain
after the First Year
Investment in Special Foods 15,000
Land 15,000
In the upstream case, the subsidiary recognizes the intercompany
gain. The unrealized intercompany gain is eliminated from the
reported balance of the land and proportionate with ownership:
Investment in Special Foods 12,000
NCI in NA of Special Foods 3,000
Land 15,000

41. Subsequent Disposition of the Asset
Peerless
Products
Special
Foods
$20 $45$35
January 1, 20X1
Purchase land
for $20,000
July 1, 20X1
Intercorporate transfer
of land $35,000
March 1, 20X1
Sell land
for $45,000
Consolidated Entity
Investment in Special Foods 15,000
Gain on sale of land 15,000
The following eliminating entry is made in the consolidation
worksheet prepared at the end of 20X5

42. Subsequent Disposition of the Asset
In the upstream case, the worksheet treatment would be the
same with the downstream transfer except – the debit would be
proportionated between Investment in Special Foods ($12,000)
and NCI in Net Assets of Special Foods ($3,000) based on the
relative ownership interests:
Investment in Special Foods 12,000
NCI in NA of Special Foods 3,000
Gain on sale of land 15,000

43. Source:
BAKER CHRISTENSEN COTTLRELL
Advanced Financial Accounting
Ninth Edition
McGRAW HILL INTERNATIONAL EDITION