F4 - Consolidation Sims

Question 1

On January 1, Year 3, Peterson sold equipment to Silver for $120,000. The equipment was originally purchased on January 1, Year 1, for $100,000. Peterson was depreciating the equipment over 10 years using straight-line depreciation. There was no salvage value. Silver decides to depreciate the equipment over eight years, also using straight-line depreciation with no salvage value. Assume all other appropriate year-end and income tax journal entries have been made.

Eliminating journal entry at December 31, Year 3:

Answer 1

The gain or loss on the intercompany sale of a depreciable asset is unrealized from a consolidated financial statement perspective until the asset is sold to an outsider. An elimination entry in the period of the sale eliminates the intercompany gain/loss and adjusts the asset and accumulated depreciation to their original balance on the date of sale:

Dr gain on sale 40,000
Cr equipment 20,000
Cr. A/D 15,000
Cr. deprec exp 5,000

Gain on Sale, $40,000 Debit
Since Peterson sold the equipment to Silver, a 100% subsidiary, the gain of $40,000 is eliminated. It was originally entered in the books of Peterson as a credit and is calculated as the sales price of the asset of $120,000, less the net book value of $80,000 ($100,000 cost less accumulated depreciation on 1/1/Y3 of $20,000).

Accumulated Depreciation, $15,000 Credit
The accumulated depreciation for the consolidated group at December 31, Year 3 is based on the original cost of $100,000. Three years of accumulated straight line depreciation is $30,000.

The accumulated depreciation shown by the separate companies is as follows:

• $0 for Peterson since the accumulated depreciation was removed as part of the journal entry recorded at the time of the sale.
• $15,000 for Silver Corp., based on one year of straight-line depreciation ($120,000 / 8 years).

The eliminating journal entry raises the accumulated depreciation from $15,000 to the correct amount of $30,000.

Depreciation Expense, $5,000 Credit
The correct amount of depreciation expense for Year 3 is $10,000 based on the original purchase of the asset by Peterson ($100,000 cost to Peterson / 10 years = $10,000). Silver Corp. recorded depreciation of $15,000 based on their purchase of the asset at the beginning of Year 3 ($120,000 cost to Silver / 8 years = $15,000).

The eliminating journal entry reduces the depreciation from $15,000 to the correct amount of $10,000.

Equipment, $20,000 Credit
The original cost of the equipment to Peterson is $100,000. The $120,000 cost of the asset to Silver must be reduced to the original amount paid by Peterson.

Question 2

Throughout Year 3, Peterson sold merchandise costing $30,000 to Silver at a price of $50,000. Silver sold 60% of the inventory by December 31, Year 3. Silver remitted payment to Peterson before year-end.

Eliminating journal entry at December 31, Year 3:

Answer 2

When affiliated companies sell inventory to one another, the total amount of the intercompany sale and cost of goods sold is eliminated when preparing consolidated financial statements. In addition, the intercompany profit must be eliminated from the ending inventory and cost of goods sold of the group.

Dr. sales 50,000
Cr. inventory 8,000
Cr. COGS 42,000

Sales, $50,000 Debit
The gross sale amount of Peterson’s sale to Silver is eliminated.

Inventory, $8,000 Credit
40% of the goods sold by Peterson are still in the ending inventory of Silver. The original cost of this inventory on Peterson’s books was $12,000 ($30,000 × 40%). The inventory is on Silver’s books at the cost to Silver of $20,000 ($50,000 × 40%).

The reduction of inventory adjusts the $20,000 inventory on the books of Silver to the correct amount of $12,000, the original cost to Peterson.

Cost of Goods Sold, $42,000 Credit
The entire amount of Peterson’s cost of goods sold is eliminated. This amount is $30,000.

In addition, Silver’s cost of sales is based on the price paid to Peterson for the inventory. The additional cost Silver paid is $20,000 ($50,000 intercompany sales price - $30,000 cost of goods sold). The amount that was sold represents 60% of $20,000, so that another $12,000 needs to be eliminated to show the cost of goods sold based on the original cost to Peterson.