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Chapter 07 - Intercompany Transfers of Noncurrent Assets and Services
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
CHAPTER 7
INTERCOMPANY TRANSFERS OF SERVICES AND NONCURRENT ASSETS
ANSWERS TO QUESTIONS
Q7-1 Profits on intercompany sales generally are considered to be realized when the affiliate
Q7-2 An upstream sale occurs when a subsidiary sells an item to the parent company. If the
Q7-3 If the purchaser records the services received as an expense, both revenues and
expenses will be overstated in the consolidated income statement in the period in which the
Q7-4 (a) Unrealized profit on an intercompany sale generally is included in the reported net
Q7-5 Profits on intercompany sales are included in consolidated net income in the period in
which the items are sold to a nonaffiliate. If there are unrealized profits on the books of one of
Q7-6 The profits continue to be unrealized in this case and therefore must be eliminated from
Q7-7 A downstream sale is a sale from the parent to one of its subsidiaries. If the asset is not
Q7-8 The entire balance of unrealized profits is eliminated in all cases. While the direction of
Q7-9 Consolidated net income is reduced by the amount of unrealized profits assigned to the
shareholders of the parent company. When a downstream sale occurs, all the profit is on the
Chapter 07 - Intercompany Transfers of Noncurrent Assets and Services
account for its investment in the subsidiary. If the parent uses (a) the cost method or (b) the
modified equity method, no adjustments are made on the parent company's books for
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
C7-1 Correction of Consolidation Procedures
MEMO
To: Controller
Plug Corporation
From: , CPA
Re: Elimination of Intercompany Profit on Equipment
Equipment
150,000
Loss on Sale of Equipment
150,000
This entry correctly eliminates the $150,000 loss recorded by Coy January 1, 20X2, on the sale
of equipment to Plug and adds $150,000 to the equipment account. By adding back $150,000 to
equipment, the balance is adjusted to $1,000,000 ($850,000 + $150,000). This represents the
carrying value of the equipment on Coy’s books at the time of sale but does not reflect the
purchase price paid by Coy ($1,200,000) or the accumulated depreciation at the time of sale
($200,000). Moreover, the consolidation entry above understates depreciation expense for the
year. The correct consolidation entry at December 31, 20X2, is:
Equipment
350,000
Depreciation Expense
15,000
Accumulated Depreciation
215,000
Loss on Sale of Equipment
150,000
A debit of $350,000 to equipment is required to raise the balance from $850,000 recorded by
Plug to $1,200,000, the initial purchase price to the consolidated entity. Depreciation expense
must be increased by $15,000 from $85,000 ($850,000/10 years) recorded by Plug to $100,000
($1,200,000/12 years) based on the initial purchase price. Accumulated depreciation must be
credited by $215,000 to adjust from the $85,000 [($85,000/10 years) x 1 year] reported by Plug
to $300,000 [($1,200,000/12 years) x 3 years]. As previously noted, the $150,000 loss recorded
by Coy must be eliminated. If the amounts included in the second consolidation entry are
omitted, consolidated net income for 20X2 and the retained earnings balance at December 31,
20X2, will be overstated and the balances for equipment and accumulated depreciation will be
understated.
Primary citation:
ASC 810-10-S99-4
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized
for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted
on a website in whole or part.
E7-1 Multiple-Choice Questions on Intercompany Transfers
1. c – After consolidation entries are made, the consolidated balance sheet should present the
asset at Fire's carrying amount on the date of transfer (which is equal to Water’s cost less
gain.
2. d – Business combinations always use the acquisition date fair values of assets and liabilities
that are acquired.
3. b – The gain should be recognized over the remaining useful life of the equipment, which in
this case is three years. Thus, in each year, 1/3 or 33 1/3% would be recognized.
4. a – Poe's original cost of the machine would be the amount reported on the consolidated
balance sheet. Additionally, an extra $50,000 in depreciation would be recorded for the
5.
b –
Depreciation expense recorded by Pirn
$40,000
Depreciation expense recorded by Scroll
10,000
Total depreciation reported
$50,000
Adjustment for excess depreciation charged
by Scroll as a result of increase in
carrying value of equipment due to gain
on intercompany sale ($12,000 / 4 years)
(3,000)
Depreciation for consolidated statements
$47,000
