Question

Upstream Intercompany Building Transactions Shiek Shoes sold an administrative building to

its parent, Pearl Industries, on January 1, 2018, for $8,000,000. At the time of sale, the building was car‑

ried on Shiek’s books at original cost of $10,000,000, with $8,500,000 of accumulated depreciation. At

the date of sale, the building had a remaining life of 20 years, and straight‑line depreciation is appropriate.

It is now December 31, 2020, the end of the accounting year, and you are preparing the working paper to

consolidate the trial balances of Pearl and Shiek. Pearl still owns the building

Required

a. Prepare the required eliminating entries for this intercompany building sale for the December 31,

2020, consolidation working paper.

b. What balances does Pearl report in its own trial balance for this building at December 31, 2020?

Consider these balances: building, original cost; accumulated depreciation, building; depreciation

expense, building. What balances should be reported on the consolidated trial balance? Show how

the eliminating entries in part a adjust Pearl’s book balances to the correct consolidated balances.

Answer 1

The gain reported by shiek shoes were 8000000 - (1000000 - 8500000) = $6500000

A)

Journal	Debit	Credit
Retained earning	$5850000
To accumulated depreciation	$650000
To building		$6500000
( To eliminate the begining year gain)
($6500000 - (650000×2/20) = 5850000)(6500000×2/20)
Accumulated depreciation	$325000
To depreciation expense		$325000
(To eliminate excess depreciation reported by pearl)
(6500000÷20)
Building	$8500000
To accumulated depreciation		$8500000
( To restate the building and accumulated dep. Account to their original acquition buys)

B)

In pearls trial balance the balance appears:

Building	$8000000
Accumulated depreciation (1)	($1200000)
Depreciation expense (2)	$400000

(1) $8000000 × 3/12 = 1200000

(2) $8000000/20 = $400000

The consolidated balance sheet should be:

Building(3)	$10000000
Accumulated depreciation(4)	$8725000
Depreciation expense(5)	$75000

3 = $8000000 - $6500000 + $8500000 = $10000000

4 = $8500000 + (10000000-8500000)×3/12 = $8725000

5 = ($1000000-$8500000)/20 = $75000

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