 Hello and welcome to the session. This is Professor Farhad in which you would look at a CPA simulation that could appear on the far section of the exam that deals with the elimination of intercompany sales of depreciable asset. This topic is also covered in advanced accounting. What I do on farhadlectures.com is I help you pass the CPA exam. I supplement your CPA accounting course. So if you have Becker, Roger, Wiley, or Glyme, or any other CPA course, what I do is I help teach you the material because the CPA course assumes you know the material already. So when they teach you, they go fast. I can help you bring your speed up to their level. So if you if you're interested, please check out my website, farhadlectures.com and also please link with me on LinkedIn. If you haven't done so, subscribe to my YouTube. I have 1800 plus accounting, auditing, tax, finance, as well as Excel tutorial. Please like my lectures, share them. If you're watching this recording, it means they're benefiting you. If they're benefiting you, it means they might benefit other people. Please share the wealth. Again on my website, this topic of consolidation is covered heavily, not heavily. It's covered specifically in my advanced accounting course so you can have the whole advanced accounting course or you could integrate this knowledge into your CPA course. Anyhow, I'll be able to take care of your knowledge so you are prepared for your prep course, which will prepare you for the CPA exam. So let's take a look at this simulation. This may not appear like as a simulation to you, but on the exam, the only difference that you might see is you might see boxes to input the account, the debit and the credit. But this is what it looks like. On January 1st, year 3, Mason sold equipment to Sunny for 120,000, which originally had a purchase on January 1st, year 1 for 100,000. Mason was depreciating the equipment, used a 10-year, using the straight line, the straight line depreciation. There was no salvage value. Sunny decides to depreciate the equipment over eight years, also using the straight line. Assume all other appropriate year end and income tax journal entries have been made. Prepare the eliminating entries for year 3. So the best way to do this is just to show you the journal entries for both Mason and Sunny because all what they're looking for is the eliminating entries. But it's important to look at the journal entries for Mason and Sunny. Then when we do the eliminating entries, it will be very easy for you to see what's happening. Mason sold the equipment for 120,000. They will debit cash 120,000. Now what would they do? They're going to have to credit the equipment. They're going to credit the equipment because they sold the equipment and it has an original cost of 100,000. Now when they get rid of the equipment, they have to get rid of its accumulated depreciation. Remember, if you're getting rid of the equipment, you have to get rid of accumulated depreciation. The equipment has a cost of 120,000. They purchased it actually, sorry, for 100,000. They purchased it for 100,000. A 10-year, no salvage value will give us 10,000 of accumulated depreciation times 2. We have accumulated depreciation of 20,000. We have to remove accumulated depreciation of 20,000. What we have here is a gain because we sold it for 120,000. The book value is 80,000. What's the book value? The book value is cost of 100,000 minus 20,000 of accumulated depreciation. The book value is 80,000. We got 120,000 for something that we have on the books for 80,000. Therefore we have a gain of 40,000. The entry on Masons is we get the cash, 100,000, debit accumulated depreciation, debit equipment, and credit gain. Now, I want you to just make sure you understand that we have to eliminate when we go forward. Those three entries here will have to be eliminated. Now, what would Sunny do on the books? We purchased an asset, which is a piece of equipment, for 120,000, and they credited cash 120,000. Now we have to do the elimination entries. We simply put, if you really think about it, cash, debit 120, credit cash 120, basically those two account cancel each other. Now, what's going to happen is this. When we buy an asset from a subsidiary, when we buy an asset from a subsidiary, what we have to do, we have to depreciate the asset as if we still have it originally on the books, because Mason and Sunny, they're going to consolidate because we are preparing eliminating journal entries. So now they're going to consolidate. So let's see what Sunny do at the end of the year. Here's what Sunny would do at year three. At the end of December 31st, year three, Sunny will debit depreciation expense of 15,000, credit accumulated depreciation of 15,000. Now, how did it come up with 15,000? They had an asset, they purchased an asset for 120,000 divided by eight years because that's what they said. They're going to depreciate this asset over eight years. That's going to give us 15,000 of depreciation. Now, at the end of the year, what we have to do, we have to prepare the eliminating entries for all of those. In other words, both of these companies will have to merge together and preparing the eliminating entries. What does that mean? It means any intercompany sales will have to be eliminated. Any gains will have to be eliminated. Starting with this gain here, we're going to have to debit gain. We're going to have to debit gain. Now, I'm answering the question. We had a gain of 40,000. We have to debit this gain of 40,000. That's fine. That's great. What else do we have to do in your opinion? Well, we have to go back and we have to go back and restore the asset to 120,000. What does that mean? It means the asset between Mason and Sonny, the asset is overvalued by 20,000 because the asset's supposed to be at 100,000 because we sold at the Sonny, our subsidiary, it went up to 120. What do we have to do? I have to credit equipment of 20,000. By credit and equipment of 20,000, basically I fixed the equipment account because it was for 120 when Mason had it, Sonny had it at 100,000. Sonny turned it to 120, it has to go back to 100 because we are preparing the eliminating entries. We have to credit the equipment 20,000. What else do we have to do? Well, here's what we have to do. We have to restore accumulated depreciation by 20,000. That's fine. That's fine. We're going to credit, I'm going to put this in a different color because that's not the final entry. We're going to credit accumulated depreciation of 20,000. Basically what I did is I restored the asset's original value, restore accumulated depreciation right now, and remove the gain. What else do I have to do? Well, there's one more thing I have to do is fix my depreciation on Sonny's books. I have to fix this entry. What's the problem with this entry? The problem with this entry is I overreported my depreciation by 15,000, by 5,000. How so? Remember, when Mason had the asset on the books, Mason had an asset of 100,000. Using 10-year life, Mason was taken 10K per year. Now, I came and I made this asset 120, depreciated over 15 years, and make depreciation of 15,000. Like I did, I'm overreporting my depreciation expense of 5,000. What do I have to do? Well, simply put, to fix this problem, I have to remove 5,000 of depreciation expense and 5,000 of accumulated depreciation. Simply put, I have to debit accumulated depreciation, 5,000, basically remove 5,000 from here, and credit depreciation expense of 5,000. That's why I told you I made this, the accumulated depreciation in green, because this is accumulated depreciation debit. This is accumulated depreciation credit. Now I can turn this into 15,000, and I credit depreciation expense of 5,000. This is the entry that they're looking for. So, on the exam, they're only looking for the eliminating entries, eliminating entries between those two transactions. But what I did is I showed you what the selling company did, what the purchasing company did. This way it's easier to just see what happened. So simply put, the gain is gone, the gain is gone. The equipment is back to 100,000. The cash is technically gone when we debit cash, credit cash. Again, the equipment is restored properly. Accumulated depreciation is restored. I credited accumulated depreciation 20,000 initially. Then I increased my accumulated depreciation and depreciation expense by 5,000. I fixed it, and accumulated depreciation back to 15,000. Everything is great now. We're back to, as if the company is still on Mason's book, for 100,000. And this is what we're supposed to do when we prepare those eliminating entries for the appreciable asset, is you want to fix all the entries to go back to the original asset status. Why? Because really the transaction between Mason and Sonny, all what it did is inflate the asset. Sometime what could happen is the asset could go down, you could have a loss, so you have to do the opposite. But this is what I do on my website, farhatlectures.com. I will show you different scenarios about those situations. But the point is you have to understand the overall big picture. So on the exam day, if you don't understand the original journal entry on Mason, you don't understand the original journal entry on Sonny's book, you're going to have a lot of hard time preparing the eliminating entries. But this is what I do on farhatlectures.com. I teach you consolidation from A to Z. I teach you means I don't review it with you. I don't assume you know anything. I'm teaching you this. Then what you can do, you will learn in advanced accounting. Then you go to my CPA courses and learn more. Then you will go to your own CPA course, whether it is Becker, Roger, Wiley, it doesn't matter, and practice, learn so you can pass the CPA exam. Listen to me carefully. Your CPA exam is a lifetime investment. So it's not like something, it's an expense. It's an investment. It's 30, 40 year investment in your career. Take it seriously. Don't shortchange yourself. Subscribe, study hard, and above all, stay safe.