 Hello and welcome to this session in which you would look at elimination entries specifically that deals with depreciable fixed asset transaction. In the prior session we looked at non-depreciable fixed asset. Depreciable is a little bit challenging than non-depreciable because you have a deep depreciation to deal with. Now bear in mind before we proceed I would like to remind you this lecture is designed for CPA candidate. So this is basically a review although I explain although I do examples but nevertheless I believe I give you an overview. If you are interested in more detail so for example if you're taking this course from A an accounting perspective course like advanced accounting please go to farhatlectures.com. As a matter of fact if you want to download the slides and work multiple choice you have to go to farhatlectures.com but the point is if you want more please visit my advanced accounting course. So depreciable fixed asset well depreciable means what it means the asset is depreciated in contrast to land so we're not talking about land anymore we're talking about equipment we're talking about machinery we're talking about furniture computers so on and so forth. So when an asset is exchanged between two companies have an parent subsidiary relationship the carrying value of the asset in the consolidated financial statement so when we prepare the consolidated financial statement the book value the carrying value should equal to the original value that would have been reported of the selling company. So if the parent company sold it to the sub when we prepare the consolidated financial statement the original book value or the cost minus accumulated depreciation should appear in the consolidated as if the sale did not occur. What does that mean? It means also that any gain or loss resulting from the intercompany transaction is also eliminated so we have to basically restore the original cost and we have to eliminate any gain or loss. In fact it's considered to be realized from the use of the asset which reflected by the yearly depreciation adjustment so part of that gain will be realized we'll see how later on in a journal entry through the depreciation adjustment okay we will see in the following example that assets cost accumulated depreciation and depreciation account are usually subject to adjustment for the purpose of consolidation and don't worry we'll work an example illustrating this concept. Let's take a look at this example on January 1st X4 company A sold the machine for 720 000 to company B. We're going to assume for this example company B is the parent company the machine had a net book value of 625 000 and that's a result of the difference of a million in cost and accumulated depreciation of 375 company A which is the sub acquired the machine at the beginning of the year and is depreciated using the straight line method of depreciation with a depreciation with an estimated useful life of eight years and no salvage value and company B accounted for the machine using the same assumptions now prepare the eliminating entries required for the consolidation purpose well let's kind of think about what we need to do well this transaction consists of an upstream sale because we're going to assume company A is the sub and company B is the parent now we're selling A is selling to B it's an upstream sale however given that A is given that A is a wholly owned by B no controlling interest is involved simply put we're going to assume there is a 100% relationship between the two therefore we don't have to worry about non-controlling interest now if you want to learn about non-controlling interest this is where you would go to my advanced accounting course but I don't want to complicate it for you because on the exam they don't you don't have to worry about those type of details in your advanced accounting course you might have to the gain is 95 000 how did we compute the gain well the machine we sold the machine A sold the machine for 720 000 the book value is 625 the difference between 720 what you got for the machine and its book value will give you the amount of the gain so you need to know how to compute the amount of the gain for the purpose of consolidation as well as the for the purpose of property, plant and equipment also the asset and its accumulated depreciation should be adjusted to their original balances in the selling company books on the date of the sale so when we prepare consolidated financial statement we have to go back and report the book value which is cost minus accumulated depreciation as of the as of the date of the transaction because we assume that we have to nullify basically because the transaction is between A and B so the easiest way to prepare the eliminating entries is to start by remembering what journal entries do we do by what journal entries do we prepare by both companies at the time of the sale simply put looking at the original entry will help us understand what do we have to do next now before we proceed any further most likely you are a CPA candidate if you are reviewing this session and if you are great you are looking for some additional help you have arrived my website forhatlectures.com can be an excellent supplemental tool I don't replace your CPA review course Becker, Wiley, Gleam, Roger, whatever you are taking miles in India I don't I am a useful addition I can help you understand the material better I explain it differently it's it's a monthly access if you cannot afford the monthly access please email me and we can talk about an alternative arrangement if you have not connected with me on LinkedIn please do so take a look at my LinkedIn recommendation like this recording share it with other connect with me on social media and by the way I give you access to almost 2500 practice questions and almost 1500 of previously released AI CPA questions please check out my website so let's take a look at company A which is the selling company and company A would receive cash of 720,000 which which happens to be the sub they will that's how much they received cash they need to remove the equipment for a million remove accumulated depreciation which is this is going to give us the book value of 625 then also they're going to have to credit again why because they book again they sold it now when we prepare company and company B we cannot have that game company B will debit the machine for 720,000 and they will credit cash well what's the problem here the machine is overstated when we prepare the consolidated financial statement the machine is overstated but here's what we have to do in addition company B recorded the depreciation expense given that it continues with the same assumption now what's going to happen is their cost went up they have five years left so if we take 720 divided by five it's going to give us a yearly depreciation of 144 for company B for company B now we have to know how much was company A depreciation because we only have to book company A depreciation in the consolidated which we will come back and revisit this so you need to understand this is company B depreciation entry on their books now as a result of the consolidation work paper including two we have to include two eliminating journal entries the first one is to adjust the asset carrying value back to its carrying value on the original seller which is company A and eliminate obviously the gain and the second and just adjust an entry so let's do that so the first thing we're gonna do we're gonna debit the gain so we have to remove this game how do we remove the game we debit the game we have to debit the machine 280,000 why because we have to restore the machine to the million dollar because notice it was if we look if we look at it from a T account perspective if this is the machine we had a million dollar and the cost then we then we we credited the machine a million we credited the machine a million and we debit the machine 720 we need to go back and put the machine back to a million therefore we have to debit the machine 280,000 so we debit the machine 280,000 let me do this one more time okay if this is the machine account and what we did is we credited the machine a million which is to remove the machine the old machine and we debited the machine for company B 720 well that's going to give us a credit of 280,000 so we need to remove this credit to go back to the original cost therefore we debit the machine 280,000 also we have to restore the accumulated depreciation that we removed because when we sold the machine we get rid of the machine we get rid of its accumulated depreciation now we have to go back and restore the accumulated depreciation which will take a credit so this is to restore the machine basically to restore the machine to its original book value this is the original book value or the original carrying value and eliminate the gain we did this also we have to book the difference in depreciation expense now how do we do that now remember the depreciation expense for the original company was 125,000 per year for the original company which is company A the depreciation expense for company B was 144,000 well guess what now our depreciation is overstated by 14,000 which is the difference between 144 and 125 which is a million dollar divided by eight years well what do we have to do we have to reverse back out reverse credit depreciation expense 19,000 debit accumulated depreciation 19,000 this is also for the consolidation purposes so our depreciation expense is not overstated and our accumulated depreciation is properly stated now this is what we have to do in the eliminating years what do we have to do in the future in subsequent years so that's very important it's important to note that unrealized gain or loss on the intercompany sale of the machine is allocated over the machines remaining useful life so what's going to happen we're going to chip away that gain or loss for that matter in subsequent year the first eliminating the journal entry would be the following here's what we have to do we have to debit retained earnings 76 let me show you the entry debit the machine 280 and credit accumulated depreciation so after the first year what's going to happen is this if you remember what we did is we booked we booked an additional we had to remove an additional depreciation of 19,000 by debiting accumulated depreciation and credited depreciation expense what that did is basically started to account for part of the game now we accounted for 19,000 of the game so the game was the original game was 95,000 a year later we are chipping away at the depreciation expense and as we chip away from the as we reduce our depreciation expense our game goes up we are recognizing the game so this is basically here what we did is as we depreciate accumulated depreciation and credit depreciation expense technically yes we are fixing the depreciation but we are also starting to recognize the game you remember what I told you earlier let me go back and show you what I told you earlier and I told you I will I will explain this one work an example is as we are going to we are going to chip away not chip away we're going to account for the gain let me just show you any gain or loss from this temporary transaction is eliminated in fact it's considered to be realized from the use of the asset which reflected in the yearly depreciation so now what we did is as we are reducing our depreciation expense per year as we are doing that we are realizing that gain so and by the time we get to year two the subsequent year the gain is no longer 95,000 why because we already reduce our depreciation expense by 19 and that's gonna keep us 76 and the following year we'll do the same thing so as we debit retained earnings because we can no longer debit gain gain is gone because gain is a temporary account we're gonna in future years we debit retained earnings and we reduce the amount by accumulated depreciation and we still have to go back and debit the machine for 280 as we did in the original year then we have to do one more entry and that is what to do what to chip away the depreciation expense so next year it will be 76 minus 19 will be debit retained earning and this will be minus 19 for accumulated depreciation now again I'm not gonna say this is a difficult topic but I'm not gonna say it's an easy topic this is a review if you feel like this is I went a little bit too fast that's fine that's why I have an advanced accounting course that you can look at this much much more in details actually my advanced accounting course I go to three years okay which is it's not really required for the CPA exam but if you need it if you want to have a good understanding why not other you can find this on four-hat lectures and on four-hat lectures you can work MCQs look at additional exercises study hard the CPA exams worth it good luck and of course stay safe