Module 6 is about intercompany transactions and non-controlling interest. In Lesson 1, we will discuss intercompany transactions with depreciable assets. In addition to intercompany transactions with inventories, the parent and the subsidiary may be involved in intercompany transactions with items of property plan and equipment. As was previously discussed, all the accounts in the consolidated financial statements are reported as if the intercompany transaction had never happened, because the parent and the subsidiary are a single economic entity. Let's see how we can apply this rule in the following example. Company P holds 100 percentage of Company S. On January 1, 2018, Company P sold the equipment to Company S for $84 thousand, which was originally purchased on January 1, 2015 for $100 thousand. The original useful life of the equipment was 10 years. Company P was depreciating this equipment using the straight line depreciation method. After the acquisition, company S depreciated the equipment over its remaining useful life of 7 years using again the same method of depreciation, the straight line depreciation method. First of all, let's calculate the carrying amount of the equipment on the transaction date and again on sale recognized by Company P. So, the annual depreciation expense recognized by Company P before the sale was $10 thousand a year. The historical cost was $100 thousand, and 10 years was the useful life of the equipment. So, on January 1, 2018, the carrying amount of the equipment was $70 thousand– $100 thousand the historical cost minus $30 thousand accumulated depreciation. Thus, the gain on sale on January 1, 2018 was $14 thousand. $84 thousand was the selling price minus the $70 thousand, the carrying amount of the equipment. The following journal entries were recorded by Companies P and S in their separate financial statements on the transaction date. So, company P debited cash for $84 thousand, debited accumulated depreciation for $30 thousand, credited equipment the cost for $100 thousand, and–recognize gain on sale– credited gain on sale for $14 thousand. Company S recorded the following journal entry: Debited equipment and credited cash for $84 thousand. In respect to this equipment transaction, the following balances were reported in the separate financial status of Company P and S on December 31, 2018, one year after the transaction date. After the acquisition, depreciation expense of $12 thousand was reported by company S. Because the acquisition price was $84 thousand, and the remaining useful life was 7 years. We know that all the accounts in the consolidated financial statements, are reported as if the intercompany transaction had never happened. Thus, in the consolidated financial statements, no gain or loss on intercompany sale is recognized because the transaction had never happened. Also, depreciation expense should be reported as if the equipment was depreciated by the seller, Company P. The carrying amount of the equipment, the cost and the accumulated depreciation, should be reported at the amounts that were supposed to be reported on the seller's books– Company P–books as if the transaction had never happened. No gain or sale from either company transaction should be reported in the consolidated financial statements. Thus, we need to remove debit again on sale for $14 thousand. Also, depreciation expense should be reported at $10 thousand, as was reported by the seller before the transaction. Thus, we need to decrease credit depreciation expense by $2 thousand. Also, the equipment should be reported as if the intercompany transaction had never happened. Thus, the historical cost should be $100 thousand. Thus, we need to increase debit the equipment cost for $16 thousand. If the intercompany transaction had never happened, the accumulated depreciation would be $40 thousand. Thus, we need to increase credit accumulated depreciation by $28 thousand. The following is the consolidation journal entry in respect to this intercompany equipment transaction at year end. So, the gain on sale was debited for $14 thousand, equipment costs was debited by $16 thousand, depreciation expense is credited for $2 thousand, and accumulated depreciation is credited for $28 thousand. As you can see, the consolidation journal entry is balanced.
