 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at elimination of unrealized gain or losses on the appreciable asset. This is part four of five. In this session, we're going to look at the partial equity as well as the complete equity method. I'm going to do it at the same time because they are similar to each other. So I'm not going to do a whole example for the complete because I can cover it with the partial. This topic is covered in advanced accounting and obviously it's covered on the CPA exam. Before we start, I would like to let you know that I would like to connect with my viewers. That's you, my subscribers. Please connect with me on LinkedIn. I'm very active on LinkedIn. I don't only post videos on LinkedIn. I also post other related articles and news about the CPA industry. If you're an accounting student, you will benefit tremendously. I also have a Facebook page, Accounting Lectures. Please like my Facebook page if you're a Facebook user and obviously you want to subscribe to my YouTube because this is where I house all my lectures. I do have a Twitter account, not that active. I should be and I do have a website and my lectures are hosted on the website but not all of them because I cannot keep updating it constantly but they're always on YouTube. But through my website, you can find more information about me and if you'd like to connect with me as well. In this session, we'll work an example using the partial equity method. Again, I'm going to also cover the complete equity method. It's an upstream sale. Let's start with the example. P company owns 80% of the common stock of S company. The stock was purchased for 960. That's fine. On January 1st, 2009, when stone beginning retained earning was 675. So the beginning retained earning when we bought the company was 675. On January 1st, 2011, which is we went through 09, 10 and now we went through two years, stone company sold fixed asset to P company for 960. So S made the sale to P. It's an upstream sale. Stone had purchased the asset for 1,350,000 on January 1st at which time their estimated useful life was 25 years. The estimated useful life to P company on 1121 when we bought it is also 10 years. Both companies employ the straight line method. And what we're going to be giving, we're going to be giving and we are asked to prepare the consolidated financial statement. And what we're going to be giving is the income statement for both companies. Basically the income statement and the balance sheet separately for both companies as well as the statement of retained earnings. So this is the income statement for P company. I would like to show you that we earned from the subsidiary 240,000. Notice right here it's here, equity in the sub. This is the net income for P company separately. This is the net income for S company separately. This is P beginning retained earnings. This is S retained earnings. This is income from above. Okay, this is P dividend. This is S dividend. This is again their dividend separately. Then we have the inventory, the investment account. This is important. This is the investment account that we have in Shannon or S company. This is property, plant and equipment. We have common stock and obviously we have no non-controlling interest on the non-controlling interest appears on the consolidated. So what's going to happen is the first thing is, look, we received income from the subsidiary 240,000. So do you guys remember what we do when we received the income? Well, I'm not received the income. We recognize 240,000 of income. If you're wondering how did we come up with this? Well, that's easy. They made 300,000 and we are 80% owner. Therefore, their income is 240,000. So what did we do when we received this income? Well, we received the income. Sorry, I keep saying receive. We did not receive the income. We're going to recognize the income. So we debited, let me just, we debited investment in S company. We debited investment in S company. Those are journal entries 240,000 and we credited equity in equity from income, equity from the investment basically, equity in sub-income, equity in sub-income, 240,000. So this is what we did. And as we did this, this is already has been done. This entry has been done. I just want to show it to you because I'm going to reverse it. I want to show you why I'm reversing this. So this 240,000 is already reflected in this number. This 240,000 is clearly showing here. So we already did this entry. Then this subsidiary declared 75,000 in dividend. So they declared 75,000. Well, if they declared 75,000, guess what? If they declared 75,000, guess what? 80% is ours. Therefore, we received 80%. So 60,000 is our share of the dividend. Therefore, what we did when they declared the dividend, we debited, we debited, dividend declared, we debited, dividend declared 60,000 and we credited the investment in S company. We credited the investment in S company 60,000. So this is what we did. And why did we do this? Because we used the partial equity method. The partial equity says whenever the company reported in that income, we increased our investment by a proportionate share right there, 240,000. And when they pay dividend, we reduce our investment by the proportionate share, which is 80% of 75,000. Now the first thing we do when we consolidate, so this is entry one, the first one we consolidate is to reverse those entries. Basically, to take out the income, the intercompany income, to reverse the effect of the parent company during the year. Why? Because when we combine them, we're going to combine revenues and expenses. We cannot combine revenues and expenses than also the income that we recognized already. So we're going to consolidate. So this is entry one. Well, guess what? We need to debit this account. We need to debit this account. Therefore, we're going to debit equity in sub income, 240,000. Now those are the consolidating entries. So basically what we did is we eliminated this. So I'm going to go ahead and do so right now. So I'm going to debit 240,000 right here. And notice now the consolidated amount is zero. I started with 240, debited the income to 40. Therefore, the ending balance is zero, right? Right here, zero. Okay? Right here, zero. Now what else? So I reverse this. I also need to reverse the equity. The equity, I debited the equity 240. I credited the equity 240. There was a net increase of 180. So there was a debit. If you combine those two, that's a debit of 180. What do I need to do? I need to credit investment in Shannon Company. I'm sorry, I debit this to 40. And I credit investment, I credit investment of 180. Okay? So basically I eliminated this already. I eliminated this. I eliminated those two. The effect of those two. Let me go ahead and credit this account 180. So this is my investment right here. I'm going to credit this account 180. And as I credit this account, it goes down to $1,250,400. I still have to remove my dividend declared. I'm going to credit dividend declared $60,000. Let me go up here and dividend declared by S Company right here. I'm going to credit this account $60,000. Okay? Why? Because that's... So the next thing we're going to do if you remember, S Company sold an asset to P Company. So S Company sold the asset to P Company. The original cost for S Company was $1,350,000. Their accumulated depreciation was $540,000. Therefore, what's going to happen is their carrying value is $810,000. This is the carrying value. So cost minus accumulated depreciation equal to the carrying value. Now, they sold this asset for $960,000. Well, if they sold it, if they have something for... They sold something for $960,000. It has a book value of $810,000. We have a gain of $1,50,000. So here's the gain that we reported. Okay? So what happened when we actually sold this asset? What happened on the S Company books and on P Company books? Well, it's very important to go over these entries so you understand what we're going to be doing next. Okay? Let me go back to the Excel sheet maybe and prepare those entries. Now, remember the sale took place in 2011. January 1, 2011. Notice here the sale took place January 1, 2011. So here's what the company did. Both of them, what they did on January 1, 2011. The parent company is going to debit equipment. They're going to debit equipment for the price that they bought it at, which is $960,000. They will credit cash $960,000. Now, the subsidiary, the sub, which is Shannon, they will debit cash. They received cash $960,000. They will credit the equipment. They'll credit the equipment. They'll credit the equipment $1,350,000. Why did they do it for that much? Because that was their original cost. They will debit accumulated depreciation. They will debit accumulated depreciation $540,000. That's what they did. And they credited a gain on sale, gain on sale of $150,000. So this is the entry that took place. This is the entry that took place when they sold the asset. And the reason I'm going through this entry because you will see it again, and again, and again. So this is what happened on the subbooks. This is, everything is happening, 1, 1, 2011. We don't care about 1, 1, 2011, but I want to show you what happened. Now, 12, 31, 2011, what did we do? 12, 31, 2011, we needed to do the following. We needed to eliminate this gain because it's an intercompany gain. So we debited this account. We debited gain on sale. We debited gain on sale. We needed to debit gain on sale to remove the gain, the intercompany gain. What we did also, we debited equipment. And you might be saying, why did we debit equipment? I'll explain it in a moment. We debit equipment, we debit equipment $390,000. Now you might be saying, why $390,000? Now remember, the equipment has an original cost. The original cost of the equipment is $1,350,000. So when it was on the books of the sub, we had an asset worth $1,350,000. When it went to the parent company, now we have an asset for $960,000. So it was $1,350,000. Now the original cost went down. Well, guess what? We need to bring back the cost when we consolidate to the affiliated cost. The affiliated cost is $1,350,000. Therefore, what I do, I add $390,000 here. I'm back to $1,350,000 because when I sold this, I zeroed this account. So I need to go back and when I report, let me just fix this because you can barely see what I did. Let me just fix the pen one moment, please. So what happened is this. We had the asset on the sub. So this is the equipment on the sub was $1,350,000. Then this equipment was sold to the parent company. This is the same equipment and we sold it for $960,000. What did we do? We removed the asset from here, made this asset go down to zero, and now we have the asset at $960,000. But what we need to do, we need to go back and bring the asset back to its original price. Therefore, original cost. Therefore, we need to debit this account $360,000 to go back to $1,350,000. $1,350,000. So that's the debit for the equipment, $1,300,000, and this is the debit equipment. So we are done with the gain. We removed the gain. We put the asset back on the books for $1,350,000 by debiting the asset. Then we need to reestablish the depreciation. An accumulated depreciation need to be put back on the books, $540,000. So this is what we did, $1,200,000, $2,011,000, and we need to repeat this entry every year until the asset is sold. Because once we consolidate, we need to remove the gain. We need to put back the asset on the books at its original cost and we need to restore the accumulated depreciation. Now year two, when we go to 2012, what's going to happen? The gain will be gone. Therefore, what we're going to be debiting is the retained earning of the parent company and the NCI rather than the gain because the gain is gone. So in case you're wondering, where did the gain go? Well, in 2012, the gain is gone. So that's one thing we have to do. So let me go back here. And so this is the first entry. The second entry is this, this is the second entry. And this is the gain I told you $1,350,000, but now we are dealing with 2012. We are dealing with 2012. Okay. Now, our depreciation based on the original cost was 81,000. This is the initial depreciation. Now the depreciation for the new company is 96,000. So what happened is depreciation went up by 15,000. What's going to happen is this, we have to reverse this depreciation. We have to reduce the depreciation. And as we reduce the depreciation, we are going to have what we call gain realization through the usage of the asset. So what's going to happen is we're going to have to do the following. We're going to have to debit accumulated depreciation credit depreciation expense 15,000. So this is what we need to do. And we did this for 1231,2011. So for 1231,2011, we made this entry with debit accumulated depreciation credit depreciation expense to recognize some of that gain because the gain is 150. Now we're going to be realizing 15,000 out of this gain. Now, guess what? We have to do the same thing for 2012. So for 2012. Remember, we have it for 2011. Now we also have to do it for 2012. For 2012, we have to do the same thing. We have to make the same entry. In addition to the same entry, we have to go back and we have to rebook the 2011 entry because the work papers, they're not part of each individual company. So we have to go back and book another accumulated depreciation 15,000. Then we're going to credit retained earning. We can no longer credit depreciation expense and credit NCI. This is for 12,000 and this is for 3,000. Now, why did we do this? This is for 2012 to recognize the gain from the 2012 depreciation. Now can we combine those two entries? Sure, we can. Accumulated depreciation, accumulated depreciation. So I'm going to show you the combined entry. So the combined entry would look something like this for 2012. The combined entry, we debit accumulated depreciation 30,000, 15,000 for this year, 15,000 for this year and 12,000 and 3,000 for the prior year. Now I forgot to tell you, I forgot to mention something because I said I'm going to do this. If we're using the complete equity method, we would have credit debited investment for using the complete equity method. We would not debit retained earnings. If we are using the complete equity method, we would have debited investment, I'm sorry, credited investment in the situation rather than retained earnings. Okay, and what I suggest we do, let's go to the work papers and start to plug in all these numbers so we can update our working papers. So you see what's going on. Okay, let's go up here and let's debit equipment. So we need to debit. Remember, we have to debit equipment, increase equipment by 390,000 to make sure our equipment is up to date. We need to debit the retained earnings of the parent company. The retained earnings of the parent company needs to be debited, 12, 100 and 100, how much is it? Yes, debited retained earning 120,000. We need to debit controlling, non-controlling interest because the gain sum of it went to non-controlling interest. We need to debit non-controlling interest 30,000 and we need to credit accumulated depreciation, credit accumulated depreciation 540,000. This was entry two. For entry three, we need to debit accumulated depreciation 30,000. We need to credit other expenses, up here we need to credit other expenses 15,000. We need to credit beginning retained earnings 12,000 and we need to credit non-controlling interest 3,000. So what's left is now what we need to do. We need to remove the investment account basically at the end. Basically, we did all the consolidation on the Excel sheet, everything should be working. The last thing we need to do is we need to remove the investment account and remove the equity of the S company. So we need to remove the equity of S company, which is the beginning retained earning of S company, need to be gone because we only use the equity of the sub. We need to remove the common stock of the sub because the only common stock we're going to have is the parent company. So let's do this. So I'm going to come up here, remove the equity of the sub. I'm going to credit the equity of, I'm sorry debit the equity of the sub, debit the equity of the sub 525. I'm going to debit retained earning of the sub because the only retained earning is the retained earning of the parent company, 1,038,000. I'm going to have to remove now the investment account and the investment account right now. Notice it's 1,050,400. I'm going to have to remove that and I'm going to have to debit this 1,250,400 because I need to remove this account. I need to credit the account, not debit credit the account right here, 1,250,400. So I removed this account and the only thing I need to do now is to re-establish my non-controlling interest. So let's go back and show you how do we re-establish the non-controlling interest. So there we go. So we remove the retained earnings because we don't the retained earnings of the sub doesn't appear on the consolidated. We remove the common stock of the sub. We remove the investment account and the only thing is left is the non-controlling interest of the company and the non-controlling interest of the company is the beginning retained earning. So this is retained earning 1,1 minus the retained earning that we started with. Started with means at the beginning of the when we purchased this company the beginning retained earnings for the life of this company when we bought it was 675. Therefore we'll take the difference between those two. We multiply it by 20% then we'll add this year income of 240,000. Therefore non-controlling interest should be 312,600 dollars. Okay so now what's left is go back to the go back and let's put the on the excel sheet update the excel sheet. So on the excel sheet the ending retained earning the we credit retained earnings we're going to credit retained earning non-controlling interest 312,600. Okay so let's go up and start to make sure our consolidation is correct. Revenue of the sub plus revenue of the parent company there is no adjustment to this revenue. This is all from the outside the total revenue 3,300,000. Revenue from the sub is eliminated this is total revenue for both a cost of goods sold of the parent plus the cost of the goods sold of the sub other expenses of the parent plus other expenses of the sub minus the 15,000 that's going to give us 360 so the total expenses is 2,610,000. The net income consolidated income is 690 but remember we have to back out we have to back out the non-controlling interest income. Remember the non-controllers non-controlling interest income will have to be backed out. Okay so how much does how much does the non-controlling interest has well guess what they have income of 300,000 they generated income of 300,000 plus we have to add back the depreciation of 15,000 and they're gonna get 20 of that times 0.2 let me do it again so they're gonna the 315,000 which is 300,000 let me just show you what these numbers are coming from 300,000 plus plus 15,000 which is the depreciation that we backed out times times 0.2 and that's 63,000 therefore consolidated net income is 627 the parent retained earnings started at 1 million 505 we debited this account 120 we credited this account 12,000 this is the ending the ending the ending retained earnings the ending retained earnings stone company retained earnings should not appear because the only retained earnings will appear on the consolidated as the parent parent company income from above obviously this is income from above income from above from above those numbers are coming from above okay so beginning retained earnings i'm sorry beginning retained earnings plus income that's coming from above 627 minus the dividend remember the dividend of only the parent company appears on the consolidated gives us ending retained earnings and notice here the dividend of the sub 60,000 was cancelled and 15,000 is going to the to the non-controlling interest that's why between the non-controlling interest and the one that we eliminate it keeps nothing for the consolidated so notice here so income from above for the non-controlling interest is 63,000 minus the dividend gives us non-controlling interest for now for 48,000 on the balance sheet we we combined the assets inventory plus sub plus the parent investment and Shannon should be zero and i showed you how we did this plant and equipment we started with the parent plus the sub plus the adjustment of 390 this is the ending property plant and equipment accumulated depreciation parent plus sub minus the debit plus the credit gives us the ending retained earnings so this is the total assets and hopefully equity will equal to that liabilities and equity we have two liabilities we combine them no adjustment to liabilities the p company common stock will appear on the on the consolidated s company common stock does not appear at zero retained earning of only the parent company of only the parent company which already computed 1,874,000 and the non-controlling interest is 333,660 which is 312,600 plus 3,000 minus 30 will give us 300 333,600 which is which makes total assets equal to liabilities and equity which is it means we did this hopefully we did this properly if you have any questions any comments by all means email me and i showed you here what we need to do if there was a complete method now if you're studying for the cpa exam you will not be receiving a complete consolidation on the exam but if you understand this you'll be in good shape for the cpa exam if you have any questions email me please if you visit my website consider donating money for the website study hard for the exam it's worth it