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6.

1 Transfers of Plant Assets


Downstream

Pop owns 90% of Son, acquired at cost equal to fair value. In 2016, Pop sells (downstream) land to Son and
records $20 gain. In 2020, Son sells the land to an outside entity at a $30 gain. Son's separate income was
$140 in 2016.

End of year 2016 Pop records 90% of ownership in Son's 2016 reported income of
$140,000 or $140 * 90% = $ 126
Investment in S 126
Income from S 126

During the transaction (2016) To record the sale and purchase of land
PAM'S BOOK
Cash X+20
Land X
Gain on sale - land 20

SUN'S BOOK
Land X+20
Cash X+20

End of year 2016 Pop eliminates $20 in unrealized profit on land sold to Son
To record unrealized gain on sale of land
Income from S 20
Investment in S 20

First Year - Elimination Entry


In the year of intercompany Pop sold the land that costs $80 to Son for $100
sale: $100 sales price - $80 cost = $20 gain on sale
- Defer any gain / loss The gain of intercompany sale of land must be eliminated,
- Restate fixed asset to cost reducing the land to it's cost.
Gain on sale - land 20
Land 20

Years Subsequent to Intercompany Sale


In years of continued The cost basis in land is reduced to adjust the investment account
ownership: to establish reciprocity with Son's equity accounts at the beginning
- Adjust investment account of the year
to defer gain / loss This entry is made at the beginning of each subsequent period
- Restate fix asset to cost Investment in S 20
Land 20

Sale in Subsequent Year to Outside Entity


2020 Son sells the land 4 years later (2020) for $130
In the year of sale to outside The $20 gain that was previously deffered is realized when the sale
entity, is made to an outside entity.
- Adjust investment account Pop makes the following entity to recognize the previously deffered
(& NCI if upstream) profit on sale of land to Son.
- Recognize the previously Investment in S 20
deferred gain / loss Gain on sale - land 20
6.2 Deferring Unrealized Profits
Downstream

Pam owns 80% of Sun, acquired at cost equal to fair value. On 12/31/2016, Pam sells machinery to Sun at a
$30 profit. The machinery has a remaining life of 5 years from 12/31/2016. Sun disposes at book value in year 5.

In the end of year of sale, the unrealized gain from a dowmstream sale of plant asset is reflected in the parent's
company accounts.
End of Year
During the transaction To record the sale and purchase of machinery
PAM'S BOOK
Machinery = 90 Cash 80
Acc Depr = 40 Acc. Depreciation - Machinery 40
Machinery 90
Gain on sale - Machinery 30

SUN'S BOOK
Machinery 80
Cash 80

Under the eqity method, Pam's books are adjusted for the unrealized
gain on the machinery.
To record unrealized gain on sale of machinery
Income from S 30
Investment in S 30

If there's loss on the transaction


Cash = $30 , Machinery = $90, Acc. Depr = $40
Loss = (Machine $90 - Acc. Depr $40) - Cash $30)
Loss = 20
PAM'S BOOK
Cash 30
Acc. Depreciation - Machinery 40
Loss on Sale - Machinery 20
Machinery 90

SUN'S BOOK
Machinery 30
Cash 30

To record unrealized loss:


Machinery 20
Loss on sale - Machinery 20

First Year - Elimination Entry


In the year of intercompany The gain on sale of machinery should not appear in the consolidated
sale: income statement, but it should be included in the consolidated balance
- Defer any gain / loss This consolidation adjustment accomplished this effect:
- Restate fixed asset to cost Gain on sale - Machinery 30
Machinery 30
6.3 Recognizing Realized, Previously Deferred Profits

Continue to recognize part of the gain, with full effect to Pam


- Pam's income from Sun (80% x 80) +6 = 70
- NCI Share (20% x 80) = 16

Defer the unrealized gain and amortize it over 5 years sharing the gain:
- Gain on sale of Machinery = $30
- Remaining useful life = 5 years

Elimination Entry for Worksheet 2017


Recognize gain / loss over Investment in S (= 30-6) 24
remaining life of aset Acc. Depreciation (= 30/5years) 6
- Adjust asset and depreciation Machinery 30
down for gains Acc. Depreciation 6
- Adjust asset and depreciation Depreciation Exp 6
up for losses

Worksheet Entry for 2018


Investment in S (= 30-12) 18
Acc. Depreciation (= 6+6) 12
Machinery 30
Acc. Depreciation 6
Depreciation Exp 6

Worksheet Entry for 2019


Investment in S (= 30-18) 12
Acc. Depreciation (= 12+6) 18
Machinery 30
Acc. Depreciation 6
Depreciation Exp 6

2020 Calculations:
Recognize the remaining deferred gain, with full effect to Pam:
- Pam's income from Sun 80%(90) + 6 = $78
- NCI Share 20%(90) = $18
Elimination entries for 2017 worksheet:
Investment in S (= 30-24) 6
Acc. Depreciation (= 18+6) 24
Machinery 30
Acc. Depreciation 6
Depreciation Exp 6

Upstream

Leaf owns 70% of Willow, acquired at cost equal to fair value. On 1/1/2013, Willow sells machinery to Leaf
at a $40 profit. The machinery has remaining life of 5 years from 1/1/2013. Leaf uses the machinery for 4 years,
then sells it at a profit at the start of 2017. Willow's income is $70 in 2013, $80 per year for 2014 to 2016, and
$90 in 2017.

2013 Calculations:
Defer the unrealized gain and amortize it over 5 years, sharing the gain:
40 gain / 5 years = $8
- Leaf's income from Willow 70% (70-40+8) = $26,6
- NCI Share 30% (70-40+8) = $11,4

Elimination Entry for 2013:


Gain on sale-machinery 40
Machinery 40
Acc. Depreciation 8
Depreciation Exp 8

2014 to 2016 Calculations:


Continue to recognize the part of the gain, sharing its effects between the controlling and non-controlling interest
- Leaf's income from Willow 70% (80+8) = $61,6
- NCI Share 30% (80+8) = $26,4

2014 Worksheet Entries


Elimination Entries for Worksheets in 2014
Investment in S = 70%(40-8) 22,4
NCI = 30%(40-8) 9,6
Acc. Depreciation 8
Machinery 40
Acc. Depreciation 8
Depreciation Exp 8

2015 Worksheet Entries


Investment in S = 70%(40-16) 16,8
NCI = 30%(40-16) 7,2
Acc. Depreciation 8
Machinery 40
Acc. Depreciation 8
Depreciation Exp 8

2016 Worksheet Entries


Investment in S = 70%(40-24) 11,2
NCI = 30%(40-24) 4,8
Acc. Depreciation 8
Machinery 40
Acc. Depreciation 8
Depreciation Exp 8

2017 Calculations:
Recognize the remaining deferred gain, sharing the impact with controlling & non-controlling interest
- Unamortized gain 1 year at $8
- Leaf's income from Willow 70%(90+8) = $68,6
- NCI Share 30%(90+8) = 29,4

Elimination Entries for 2017 Worksheet


Investment in S 5,6
NCI 2,4
Acc. Depreciation 32
Machinery 40
Acc. Depreciation 8
Depreciation Exp 8