 we would look at the elimination of unrealized gain or losses on specifically non-depreciable asset and to be more specific we're going to be dealing with land. Now why am I starting with this non-depreciable asset because eventually we're going to look at depreciable asset. So it's very important that you understand how non-depreciable asset work because it's easier to understand how depreciable asset work and this is basically a series of one of five lectures I will having. This topic is covered in advanced accounting and obviously this topic is covered on the CPA exam the FAR section. So make sure you understand this before you move into the depreciable asset. Okay now before we start I would like to let you know that I would like to connect with my viewers. Please connect with me on LinkedIn. I'm very active on LinkedIn. I post lectures as well as other related accounting and CPA posts. If you are a Facebook user please like my Facebook page accountinglectures.com. All my lectures are housed on my YouTube. Therefore make sure to subscribe to my YouTube and I do have a Twitter account. I'm not very active but I should be more active on Twitter and obviously you could reach me or find lectures on my website. So let's go ahead and get started with the first topic which is intercompany sales of non-depreciable property specifically non-depreciable property can be substituted by land. Okay when there's an intercompany sale of non-depreciable property work papers entries are necessary. Now what are we discussing here? Okay we have a parent company and we have a sub. Here's the general rule. Well what's going to happen sometime the sub the parent company will sell to the sub. Sometime the sub will sell to the parent company and when we have a sale we might have a gain slash loss. So we might have a gain or a loss because of the transaction between the parent and the sub. When we consolidate when we prepare the consolidated financial statement gains need to be eliminated losses need to be eliminated because there are intercompany gains and intercompany losses and we have to bring the asset back to its original basis. So this is the overall idea of what we're trying to do eliminating any gain or losses. Okay so so work papers are necessary to include gains and losses on the sale and the consolidated net income only at the time the property is sold to an outside affiliate group. Remember I have the P and I have the sub and any gain or losses between those two eliminated the only gain and losses is recorded the one that's to the out with the outsider. So we have to eliminate the gain and losses that's that's within the company and only sold to parties outside the affiliate. Okay and that that amount should be the difference between the cost of the property that the affiliated group and the proceeds received. So at the end what we do we see what was the selling price what was the proceeds minus the cost and the cost will be the one to the affiliated group the original basically the original cost. Also we have to present non depreciable property in consolidated balance sheet at its cost to the affiliated group so always we have to go back and report the property at the cost to the affiliated group when we consolidate and we'll see this in an example the topic I believe it's straightforward but again you want to make sure you understand this very well before you move into depreciable property. So we're going to look at an upstream sale and what's an upstream sale upstream sale is when the subsidiary sell to the parent the parent is up there and it's an upstream upstream going upward. P company owns 90% of the outstanding stock of S company on January 1st 2011 S company sold the land to P company for 350 000 that had originally purchased the land on June 30th 2007 for 200 000 okay so let's just think about it for a moment the the subsidiary sold the land for 350 the cost of this land for the subsidiary is 200 000 therefore the subsidiary is going to book again of 150 000 hopefully we can all see this that's the subsidiary. P company plans to construct the building on the land bought from S in which it will house its new production machinery that's fine and that's not really relevant for us the estimated useful life of the building for the new machinery is 15 years we're not really dealing with the machinery so that's also not relevant so what entry do we make on the parent company what entry do we make on the sub company so what would the sub company record well the sub company will have to record the cash the sub company received cash so they will debit cash 350 000 they will credit land they remove the land for 200 000 and they will book again of 150 000 this is the sub the parent company bought the land at 350 at 500 000 I'm sorry at 350 therefore they debit land 350 they will credit cash 350 so this is the transaction that took place on the parent company and this is the transaction that took place on the subsidiary now you have to understand that the parent company owns remember we own 90 percent of us what does that mean it means out of this gain out of this gain we are going to receive in a sense 90 percent why because we own 90 percent so we're going to be allocated 90 percent of this gain so what is 150 times 90 percent that's 135 000 well what do we have to do we're using the equity method so what's going to happen is this okay what we have to do is we have to debit equity and income 135 basically we have to reduce our income by 135 and credit reduce our investment by 135 why are we doing this because the gain on the sale of 150 the gain on the sale of 150 will be reflected in our investment but this is an intercompany gain therefore we have to eliminate it okay this is to reduce this is the parent company to reduce to reduce its income from the subsidiary by its share of the intercompany gain now the parent company will that will not do anything until the lens so sold to an outsider now what is what do we have to do at the end of the year at the end of the year remember this gain here cannot be on the consolidated financial statement so simply put remember what we talked about earlier we said the only gain the gain to the outsider if you remember this slide here we only we count the gain to the outsider therefore the 150 thousand dollar gain will need to remove this and remember the cost the none the present the non depreciable property at the cost of the affiliated group the cost of the affiliated group is not 300 000 the cost of the affiliated group is 200 000 therefore we have to prepare a journal entry okay to remove the gain and reduce the land to its original cost because let me show you what happened from a t-account perspective from a t-account perspective the land is listed at 350 at the parent company okay why because they bought it at 350 this is incorrect the land is over overvalued why because the land supposed to be at only 200 000 therefore what we have to do is we have to debit gain on the land on sale of land this is to remove the gain to remove the gain and what's the gain the gain is 150 right here to remove this gain let me just clear this to remove this gain we debit the gain and we have to credit the land why because the land is listed again let me show you the t-account the land at p company is listed at 350 but the affiliated group it should be only 200 000 simply put this transaction here will act as if the sale never took place why well we're back the land is back to 200 000 and the gain is gone therefore the gain is gone so simply put this gain is gone the land is back to 200 000 because this is basically we reduce the land by 150 the land is 200 000 and credit the cash and debit the cash they cancel each other out so basically we're back the land of 200 000 that's basically what happened as if the transaction never took place as if the transaction never took place and this is how it's supposed to be when you have an intercompany gain or loss it needs to be eliminated so this entry is made to eliminate the gain reported by s company and to reduce the balance at at the parent company from 350 to the cost the affiliate which is 200 000 now what else do we have to do in an upstream sale prepare the the work entries for the end of the year december 31st 2012 by the end of the year of the following year remember this was this is december 31st 2011 a year later what's going to happen we basically have to do the same thing however the gain account is no longer with us remember we debited gain here okay to remove the gain on the sub but what happened by the end of 2011 this gain is closed so the gain will be gone okay but but remember the gain this gain went into the sub retained earnings so the gain went into the sub retained earning okay and the land the land was on the parent company so let me go back to the land the land was 350 at the parent company so land at the parent company would still be on the parent company books 350 therefore what we have to do is this the following year we have to debit if we're using the cost or the partial equity method we have to debit the beginning the beginning retained earning 135 why 135 because this is the controlling interest and non controlling interest 15 000 a total of 150 000 simply put at the beginning of year two this is year two which is 2012 we have to reduce the the beginning retained earning of 150 why because the gain the gain that we eliminated year one we eliminated for the consolidated but it's still on the sub's books and retained earning of the sub therefore we have to debit the beginning retained earning of 150 to eliminate that gain and we have to credit the land of 150 because remember on the individual books of the on the individual books of the parent company the land at the parent company is is 350 therefore we have to we have to reduce by 150 so it goes back to 200 000 so we have to do this entry every year until the asset is sold until the asset is sold let me eliminate erase okay now if we're using the the complete equity method the complete equity method we update our investment rather than the rather than the beginning beginning retained earning therefore what we have to do is we have to debit the investment account 150 000 because we deal with the investments and we have to reduce the land 150 000 so again this is if we are using the equity method this is if we are using the cost or the partial equity method what we do in year two and again these entries would repeat themselves every year until the asset is actually until the asset is actually sold so simply put let's summarize the p company continue to report the land on their statement at the intercompany selling price of 350 remember the individual and i keep i am doing i did this several times the individual company the parent company would still show the land at 350 however and the consolidated will have to show it at 200 000 and that's why every year we have to do this entry we have to reduce the land and we have to remove the earnings from the earnings from the retained earnings if the intercompany seller has been the parent so if this was a downstream sale so because this i showed you this is an upstream sale if this was an downstream sale what is downstream sale if we switch the subsidy the sale going from the parent to the subsidiary then the entire 150 would be to the controlling interest we would not have any non-controlling interest resulting in a debit of 150 to the beginning retained earning of the company simply put if this was a downstream sale so this is downstream it means the parent company sold it then non-controlling would be gone and this will amount will be 150 because we will not have a non-controlling interest because we are selling to the subsidiary therefore the gain will need to be eliminated from our books okay there is no nci simply put okay now let's take a look at another example to compute the net gain when we sell to an outsider so a p company owns parent company owns 90 of the outstanding common stock of s company on january 1st s company sold land to p company for 600 000 so this is basically an upstream sale okay that's fine the company has an originally purchased the land for 400 000 so the s company the subsidiary they have a gain of 200 000 400 600 minus 400 equal to 200 000 remember this gain will be eliminated at the end of the year okay on january 1st 2012 p company the parent company now sold the land purchased from s company to a company outs to an outside affiliate of four seven hundred thousand now p company the cost they sold it for 700 000 their cost is 600 000 therefore p company would would report a gain the third party from third party this is a gain from third party we don't eliminate this gain this gain will stand because it's a gain to to to an outside party now if i ask you what should be the total gain reported in in 2012 well if you really think about it the gain reported is should be 300 000 we already reported 100 000 okay we still have to report the other 200 000 why because the total gain for the group for the for the basically for both the sub and the sub for the sub and the parent so we have first we went from the the we we have a gain from the the subsault the subsault to the parent and we had a gain of 200 000 then the parent sold to a third party and we have a gain of 100 000 therefore the total gain for both is 300 000 okay so let's compute this compute calculate the gain on the sale of the land that's recognized on the books of p on the books of p for that year they would recognize 100 000 calculate the gain that should be recognized and they consolidate that financial statement and they consolidate that financial statement the gain should be 300 000 simply put we should show total gain of 300 000 when when all all said and done the total gain will be 300 000 of which 100 is from 100 is here 100 coming from here if 100 coming from here how much left to be recognized 200 000 therefore what we need to do we need to book an additional entry at December 31st 2012 to credit gain on the sale of 200 000 and debit beginning retained earning if we're using the cost or the partial equity method and a non-controlling interest 200 000 now you might be saying hold on a second why am I doing this what's the purpose of these entries remember in 2011 in 2011 in the sub what the sub did in 2011 the sub-debted cash the sub-debted cash they sold it for how much they sold it for 600 000 so remember in 2011 the sub-debted cash 600 000 credited the land 400 000 and the sub recorded again of 200 000 recorded again of 200 000 this is year one for the sub now this gain was eliminated year one and they consolidated but it stayed on the books of the sub therefore this 200 000 went into retained earnings so what we have to do when we actually sold when we actually sell the when we actually sold the asset we have to take it out of the sub retained earning and and and transfer the gain into the affiliate which is that's why we credit gain on the sale of 200 000 okay now also what we did so this is so this is a gain of 200 000 so this is basically will be part of the consolidated financial statement and we have another gain here of 100 000 so when the when we sold it when we sold it to the third party the parent company debited cash 700 000 credited land 600 000 and credited gain 100 000 therefore we have a gain of 100 000 here and the gain of 200 000 here therefore as i told you the total gain for the affiliated group is 300 000 that should be reported and they consolidated financial statement now for using the complete equity method the only difference is rather than using the beginning retained earning everything goes to the investment account so the investment account because we're using the equity method so it's basically the same thing except you know the difference is this let me highlight the difference between the two method because you might be using the cost method you might be using the you might be using the the cost versus the equity method so i want to make sure i highlight the difference between the two here's the highlighter so it's either you'll debit this account or you'll debit this account depending what entry what method you are using now again if there was a if this was a a downstream downstream sales the whole thing will go to beginning retained earning because we will not we'll not have nci okay if you have any questions any comments by all means email me or see me uh well if if i happen to be teaching the class see me in class if you need additional lectures please go to my website and if you happen to go there um please consider uh make a donation if you're studying for your CPA exam as always study hard it's worth it good luck