Dr. M.D.

Chase
University
Advanced Accounting 405-32B

Long Beach State

Interco Transactions-Upstream Sale: Depreciable Asset Page 1

I. INTERCOMPANY TRANSACTIONS EXAMPLES: Upstream Sales of Depreciable Assets

The 12/31/x5 balance sheet data of a parent and its subsidiary are presented below in condensed form. The parent acquired its 80% interest
in the subsidiary five years ago at a price that approximated book value.
Debits
P Co.
S Co.
Machinery.....................
$
175,000
$
Other Assets..................
483,000
Investment in Y Co............
316,000
Operating Expenses............
175,000
$ 1,149,000
$
Credits
Accounts payable.............
$
40,000
Accumulated depr/machinery
60,000
Capital stock.................
600,000
Retained earnings (1/1/x5)....
189,000
Sales.........................
260,000
$ 1,149,000

75,000
353,000
163,000
591,000

19,500
13,500
200,000
140,000
218,000
591,000

Three years ago (on 1/1/x3) S Co. sold machinery with a net book value of $44,000 to P Co. for $55,000. The machinery had an
estimated life of 20 years.
Required:
A. Present the necessary entries to eliminate the effects of the intercompany sale of depreciable assets on the consolidated working papers.
(There were no intercompany transactions in year x5.)
B. What is the total NI; Controlling interest NI and MI NI?
C. What is the minority interest at 12/31/x5 ?
D. What is consolidated RE at 12/31/x5?
Solution:
1.
Eliminate the effects of the transaction and recognize the gain allowable to date
Step 1: Eliminate the gain on the sale:
P RE (.8)(11,000)(3 years).....
8,800
(Eliminates gain that was "booked" by S at the time
S RE (.2)(11,000)(3 years).....
2,200
of the sale; In the year of sale net income was
A/D-machinery..............
11,000
allocated to MI in the income distribution)
Step 2: Recognize the gain allowable to date:
A/D-Machinery (11,000/20)(3)
P RE (11,000/20)(2)......
S RE (11,000/20)(2).......
Deprec. Exp. (11,000/20)...

1,650

2. What is the total NI; Controlling interest NI and MI NI?

Total NI:
P net income (260,000 - 175,000)......
$
S net income (218,000 - 163,000)........
Current yr interco transaction adjustments.
Consolidated net income..........................
$
To MI:

(Total gain recognizable to date)

(P gain recognized in prior periods)
(MI gain recognized in prior periods)
(gain recognized in current year)

880
220
550

85,000
55,000
550
140,550

MI%(SIGNI* + upstream nominal credit adjustment - upstream nominal debit adjustments)

.2(55,000 + 550 - 0)
$11,110

Dr. M.D. Chase

University
Advanced Accounting 405-32B

Long Beach State

Interco Transactions-Upstream Sale: Depreciable Asset Page 2

To CI:

PIGNI** + P%(S Adjusted net income) + dnstream nominal credit adjustments - dnstream nominal debit adj
85,000 + .8(55,550 + 0 - 0) + 0 - 0
$129,440
*SIGNI = Subsidiary internally generated net income
**PIGNI = Parent internally generated net income
3. What is the minority interest at 12/31/x5 ?
MI: MI%(S C/S) (.2)(200,000).......
$
MI%(S RE) (.2)(140,000)...............
MI share of consolidated net income......
$

40,000
28,000
11,550
79,110

4. What is consolidated RE at 12/31/x5?

P RE at beginning of year................
$
Controlling Interest share of consolidated net income..
Consolidated Retained earnings 12/31/x5................... $

189,000
129,440
318,440