Question

Gama buys building on January 1, 2019 for $1,000,000 and has a useful life of 10 years. Straight line depreciation is used. On January 1, 2019, Gama sells building to 90% owned Rays for $1,300,000. Rays also uses a remaining useful life of 10 years. At December 31, 2019, prepare consolidation worksheet entries TA (Transfer of asset) and “ED” for (“extra depreciation” ). Show account names and amounts (use whatever lines necessary). Prepare below the consolidation worksheet at December 31, 2019 for the accounts involved in this transaction. Label the two entries (TA) and (ED).

Answer 1

The gain or loss on the intercompany sales of depreciable assets is unrealized from a consolidated financial statements perspective until the assets is sold to an outsider. A working paper elimination entry in the period of sales eliminates the intercompany gain or loss and adjusts the assets and accumulated depreciation to their original balance on the date of sale

On January 1, 2019 Journal entry to record the sales in the books of Gama

Description	Debit	Credit
Cash	1,300,000
Accumulated Depreciation - Building	-
Building		1,000,000
Gain on disposal of Equipment (Intercompany)		300,000

On January 1, 2019 Journal entry to record the Purchases in the books of Ray (Subsidiary)

Description	Debit	Credit
Building	1,300,000
Cash		1,300,000

At the end of year Ray (Subsidiary) will record following journal entry for depreciation

Description	Debit	Credit
Depreciation - Building	130,000
Accumulated Depreciation - Building		130,000

As a result of these transaction Parent company (Gama) have recognized unrealized intercompany gain of $ 300,000 and Subsidiary (Ray) have charged excess depreciation $ 30,000 for year ending December 31, 2019

		due to	Excess
	Original	Intercompany gain	Depreciation
Cost $	1,000,000	1,300,000	300,000
Useful life (years)	10	10	10
Depreciation	100,000	130,000	30,000

When consolidating 100% of all intercompany transactions and balances must be eliminated, even parent own less than 100% in the subsidiary

Below will be working paper elimination entry for consolidation related to sales/purchase of depreciable asset

prepare consolidation worksheet entries TA (Transfer of asset) - below will be entry to eliminate intercomany gain and restate building to original cost

Description	Debit	Credit
Gain on disposal of Equipment	300,000
Building (1,300,000 - 1,000,000)		300,000

and “ED” for (“extra depreciation” ) - below will be entry to eliminate excess depreciation

Description	Debit	Credit
Accumulated Depreciation - Building	30,000
Depreciation - Building		30,000

In subsequent year, the intercompany gain on sale of asset ($ 300,000) and excess depreciation ($ 30,000) has been closed to Retained earning. below entry will be recorded in next year working paper elimination entry for consolidation.

Description	Debit	Credit
Retained Earning (Eliminations)	270,000
Building (300,000 - 30,000)		270,000

Description	Debit	Credit
Accumulated Depreciation - Building	30,000
Depreciation - Building		30,000