 Hello and welcome to the session in which you would look at intra-company land transfer. What does that mean? It means when one company, a parent company for example, sells land to the subsidiary or the subsidiary sells land to the parent company. When the parent company sells land to the subsidiary, we call this a downstream sale and when the subsidiary sells land to the parent, we call this an upstream sale. Now this transaction is not common in the real world, not as common as for example inventory. And the reason is in inventory, many companies they have a retail distribution relationship where one company sells the inventory to the other company, they're both related somehow, then the second company sells it maybe to a third company, an outside party or within to another subsidiary, then the subsidiary subsidiary sell it to a third party, outside party. But for land, basically you're transferring the land from one company, putting the title of the land in another company. Not as common, nevertheless, it's very beneficial that we learn about this. So usually the seller would records a gain that doesn't have to, it can't be a gain, but usually it's again not a loss, not likely to have a loss. And what's going to happen to that gain on the seller's book, remember the gains are closed to retained earnings. So just I want you to keep this in mind as we go through the transaction. Now the buyer will have an inflated land book value assuming the seller sold it at a gain. It means now the buyer paid that cost plus the gain, now the land is inflated on the book value of the buyer. So unlike inventory where inventory is sold after a short period of time, land on the buyer's book might sit on the buyer's balance sheet for many years. The good news or the easy part about having land transfer is you don't have to worry about depreciation. But what's going to happen, you're going to have an inter-entity gain because the seller has a gain that must be eliminated for subsequent period until that land is sold. And remember we have an inter-entity gain and also what we have is inflated book value of the land. So both of those will have to be eliminated in the year of transfer as well as in subsequent years, which will see how we perform those transactions and those journal entries by working this example. So let's assume in year X1, Adam Company sold a land to Ryan Company for 100,000 with an original cost of 60,000. So Adam is the seller, Ryan is the buyer, the related party. It doesn't matter what Adam is the parent, Ryan is the subsidiary or vice versa. The key is to learn about the journal entries and I will show you what difference does it make toward the end. Before we look at the journal entries, I would like to remind you whether you are a student or a CPA candidate and most likely you are. 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Why not share it with other and press on the like button. Obviously, if you liked it, connect with me on Instagram, Facebook, Twitter, Reddit, and I created a group me account called CPA exam support group. Okay, let's journalize the entries from Adam's perspective. Adam is the seller. Adam will debit cash, assuming it's sold for cash for 100,000, credit the land for 60,000, the original cost, and Adam will record a gain on their books for 40,000. Now, from Ryan's perspective, Ryan bought a piece of land for 100,000. Ryan will debit. Ryan is the buyer will debit land for 100,000, and they will credit cash for 100,000. Now, at the end of the year, we're assuming this land is not sold to a third party. What's going to happen? We have two issues. One is the gain. When we consolidate, this gain should not appear. And we have a land inflated land, inflated land by 40,000, because 60 is the original cost. Now, it's reported at 100,000 at Ryan's company. Simply put, we're going to have to eliminate those, because let's think about it just kind of real quick. The cash can't show it's other debit cash, credit cash, and we have land of 60,000 debit, a credit land of 60,000 debit, we still have a land inflated land of 40,000. So we have an inflated land of 40,000 and a gain on the sale for 40,000. Well, let's clear them. We're going to debit this account to make this account go away and credit the land to make this remaining 40,000 goes away. So in year one, what we do is we debit the gain because this gain, when we consolidate, should not be there. The gain sits on Adam's books, but not when we consolidate. This gain has nothing to do with the overall group, which is Ryan plus, Ryan plus Adams. Now, in subsequent year, the gain will remain in retained earnings. Keep that in mind of the seller and the land is will be inflated will be inflated on the buyer's side. So what do we have to do in subsequent year until the land is sold? Well, what we have to do, we have basically book the same entry, except the gain is no longer there. What we have to do is debit retained earnings for 40,000 and credit the land until that land is actually sold until the land actually sold. This is in subsequent years. So notice those two entries are technically the same, except that in subsequent years, that gain is gone. What's left with us is the gain was booked in retained earnings of the seller of Adam's company. Now, if this was a downstream sale, what we do, we debit rather than retained earnings, we'll debit the investment account just so you know whether it's a downstream or upstream. This is this is the difference that it's going to manifest itself. Now, eventually the land will be sold. If that's the case, once the land is sold to an outside party, we need to remove the third gain from retained earnings. Remember, we had that the third gain every year we take out of retained earning or if it's the downstream sale from the investment account. And once once the land is sold, we remove it for the first time. And now we book the final actual gain. Now we are ready to book the actual gain. So once that asset that land is sold to an outside party, what's going to happen is we're going to debit retained earnings. Remember that retained earnings that we debit every year until the asset is sold. Well, now the land is sold and we credit an actual gain. Now, this gain is basically permanent. It's going to stay with us. And for the sake of illustration, let's assume this piece of land was sold for 115,000 by Ryan. Well, Ryan will debit cash 115,000. They will credit the land for the cost that they had 100,000 and they will have a gain of 15,000. So notice what happened. The gain in total between Ryan and Adam is how much? 55,000. Well, does this make sense? Yes, because we sold it for 115 and the original cost of the land was 60,000. So the total gain is 55,000. 40,000 of it now booked on Adam's books and the remaining 15 is books on Ryan. And when we combine them together on the consolidated financial statement, when it's sold, it's 55,000. What should you do now? Go to farhatlectures.com and work multiple choice questions. This is how I can help you. I can reinforce the concept. So you are ready for your course. You are ready for your CPA exam. Don't shortchange yourself. Invest in your education. Good luck. Study hard. And of course, stay safe.