Intercompany Sale of Fixed Assets

On January 1, 2020, Entity J acquired 80% of outstanding ordinary shares of Entity K at a

goodwill of P1,440,000. On January 1, 2020, there was an upstream sale of land with a
cost of P8,000,000 at a selling price of P8,800,000. The land was eventually sold by the
buying affiliate to third persons the following year. On January 1, 2020, there was a
downstream sale of equipment with a cost of P1,600,000 and accumulated depreciation
of P320,000 at a selling price of P1,440,000. The equipment is already 4 years old at the
date of sale.

On July 1, 2021, there was an upstream sale of machinery with a cost of P2,160,000 and
accumulated depreciation of P1,440,000 at a selling price of P480,000. The machinery is
already 6 years old at the date of sale. For the year ended December 31, 2021, Entity J
reported net income of P6,400,000 while Entity K reported net income of P4,000,000
and distributed dividends of P1,200,000. Entity J accounted for its investment in Entity K
using cost method in its separate financial statements.

1. Compute the consolidated depreciation expense of the fixed assets in 2021

A. P338,664C. P493,336
B. P440,000D. P320,000

2. Compute the consolidated carrying amount of the depreciable fixed assets on

December 31, 2021
A. P1,800,000C. P1,680,000
B. P1,720,000 D. P1,600,000

3. Compute the non-controlling interest in net income for 2021

A. P832,000C. P992,000
B. P1,000,000 D. P840,000

4. Compute the consolidated net income attributable to parent shareholders for 2021
A. P8,790,000C. P9,650,000
B. P9,450,000 D. P10,610,000

Solution:

1/1/2020 Upstream Sale of Land

Proceeds P8,800,000
Recorded amountP8,000,000

Gain on Sale of Land (per books)P 800,000

Realized Gain in 2020 Consolidated F/S -

Realized Gain in 2021 Consolidated F/S P 800,000

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1/1/2020 Downstream Sale of Equipment

ProceedsP1,440,000
Book Value (1,600,000 – 320,000)P1,280,000

Gain on Sale of Equipment (per books)P 160,000

Realized Gain in 2020 and 2021 Consolidated F/S

P160,000 / *16 yrs. P 10,000

*Accumulated Depreciation P320,000 / 4yrs. old

P80,000 annual depreciation

Original Cost of EquipmentP1,600,000/80,000 = 20 yrs. original life

7/1/2021 Upstream Sale of Machinery

ProceedsP 480,000
Book Value (2,160,000 – 1,440,000) 720,000

Loss on Sale of Machinery (per books)P (240,000)

Realized Loss in 2021 Consolidated F/S

P240,000 / *3 = P80,000 x 6/12P (40,000)

*Accumulated Depreciation P1,440,000 / 6 yrs. old

P240,000 annual depreciation

Original Cost of MachineryP2,160,000/240,000 = 9 yrs. original life

Working Paper Entries in 2020/

13. To eliminate the Intercompany Sale of Land during the year.

Gain on Sale of Land 800,000 (UG)

Land 800,000

14. To Eliminate the Intercompany Sale of Equipment during the year.

Gain on Sale of Equipment 160,000 *1,440,000 - 1,280,000

Equipment 160,000 * 1,600,000 - 1,440,000
Accumulated Depreciation 320,000

Gain
Equip, net

160,000/16 = 10,000 RG

15. To Recognize the Realized Gain on Intercompany Sale of Equipment

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 Accumulated Depreciation 10,000
Depreciation expense 10,000 (RG)

books 1,440,000/16 = DEpr of new owner 90,000

conso 1, 280,000/16 = Depr of orig owner 80,000

*Loss 1,280,000BV : Proceeds 1,120,000 Loss 160,000

1,120,000 / 16 = 70,000
1,280,000/ 16 = 80,000

Depr Exp 10,000 (RL)

Acc Depr 10,000

Working Paper Entries in 2021

13. To eliminate the Intercompany Sale of Machinery during the year.

*Machinery1,680,000
*Accumulated Depreciation1,440,000
*Loss on Sale of Machinery 240,000 (UL)

ProceedsP 480,000 vs. 720,000 (BV) = 240,000

Book Value (2,160,000 – 1,440,000) 720,000

Loss on Sale of Machinery (per books)P (240,000)

Orig cost (Prev Owner) 2,160,000 New Owner (SP) 480,000

14. To recognize the Realized Loss on the Intercompany Sale of Machinery.

Depreciation Expense 40,000 (RL)

Accumulated Depreciation 40,000

240,000/3 = 80,000x 6/12 = 40,000

480,000 / 3 = 160,000
720,000/3 = 240,000 80,000 x 6/12 = 40,000

15. To recognize the Realized Gain on the Intercompany Sale of Land.

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 S P O
8M 8.8 M 9M
200,000 gain

Retained Earnings 640,000

NCINAS 160,000
Gain on Sale of Land 800,000
or

Retained Earnings 640,000

NCINAS 160,000
Land 800,000

Land 800,000
Gain on Sale of Land 800,000

16. To Eliminate the Intercompany Sale of Equipment last year.(D)

Retained Earnings 160,000

Equipment 160,000
Accumulated Depreciation320,000

17. To recognize the Realized Gain on the Intercompany Sale of Equipment.

Accumulated Depreciation 20,000 (as of two years)

Depreciation Expense 10,000 (RG in 2021)
Retained Earnings 10,000 (RG in 2020)

Supplemental Problem COMPOUND ENTRY

RE 150,000
Equipment 160,000
Accum Depreciation 300,000
Depr Exp 10,000
------------------------------------

2020
RE 150,000
EQUIP 160,000
ACCUM DEPR 310,000

RG this year (2021)

Accum Depr 10,000

Depr 10,000

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 Consolidated Depreciation Expense 2021

EquipmentP 80,000
MachineryP240,000 P320,000

Consolidated Book Value of Depreciable Fixed Assets in 2021

EquipmentP1,600,000
Accumulated Depreciation (480,000) 320,000 + 160,000
P1,120,000

MachineryP2,160,000
Accumulated Depreciation (1,560,000)
P 600,000 1,440,000 + 120,000

P1,720,000

Total Controlling Non-Controlling

Net Income of Parent (books) P6,400,000 P6,400,000 -
Net Income of Subsidiary (books) 4,000,000 3,200,000 P800,000

Add/Deduct Amortization of Excess

Less: Impairment of Goodwill
Less: Interco. Dividend Revenue (960,000) (960,000)
Add: Gain from Bargain Purchase

Add: RG – Land 800,000 640,000 160,000

Add: RG – Equipment 10,000 10,000

Add: UL – Machinery 240,000 192,000 48,000

Less: RL – Machinery (40,000) (32,000) ( 8,000)
P10,450,000 P9,450,000 P1,000,000

-end of material-

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