1. If a company sells a depreciable asset to its subsidiary at a profit on December 31, 20X3, what account balances must be eliminated or adjusted in preparing the consolidated income statement for 20X3? If the sale instead occurred on January 1, 20X3, what additional account will require adjustment in preparing the consolidated income statement?
2. How are unrealized profits treated in the consolidated income statement if the intercompany sale occurred in a prior period and the transferred item is sold to a nonaffiliate in the current period?
3. When a parent company sells land to a subsidiary at more than book value, the consolidation entries at the end of the period include a debit to the gain on the sale of land. When a parent purchases the bonds of a subsidiary from a nonaffiliate at less than book value, the consolidation entries at the end of the period contain a credit to a gain on bond retirement. Why are these two situations not handled in the same manner on the consolidation worksheet?

 

Question 1

The selling company will close the gain on disposal into its Retained Earnings account for the year ending 20X3. This is because, as a business combination, no earning has been made from the inter-sale of the asset. The consolidation worksheet has to eliminate the unrealized profit in the sale and the excess depreciation expense. The following entries are made; in the year 20X3, the consolidation transfer entry, we debit the gain on the sale of the asset and the asset itself and credit the acquired reduction. In the consolidation of excess depreciation, we debit the accumulated depreciation by excess depreciation and credit the depreciation expense by the same amount (Elliott & Elliott, 2011). Suppose the sale occurred on January 1, 20 x3 the beginning of the year. In that case, we eliminate the unrealized profit from the consolidated income statement and reduce the depreciation expense for the year to be relevant to the asset's historical cost (Palepu et al., 2020). There are no changes in the prior adjustments made to the asset and depreciation expense, but there will be an overvaluation of Retained earnings. (D, 2021

Question 2

When the asset is sold to a third party, the remaining non-affiliate and the portion of the gain will be earned. According to Picker (2016), the firm recognizes the remaining intercompany profit from the asset's sale in the consolidated income statement. Revaluation is done on the accumulated depreciation after the intercompany sale to the date of purchase. This is done to the non-affiliated to determine the actual gain or loss from the third-party sale.

Question 3

The gain made on the sale of land by a parent company to a subsidiary is eliminated so that it does not appear in the consolidated income statement. The payment made is debited, and the same amount is credited to the land account to eliminate. The reason for debiting the revenue is to stop the land transaction from the consolidated financial statements (Elliott & Elliott, 2011). The crediting on the land account will reduce the carrying value; therefore, the balance sheet will have the land stated in its original cost. The elimination ensures no future net incomes reflect inter-firm transactions.