Provide background information of what intercompany plant asset sales are and the consolidation process?

Expert Solution

Any plant asset may be sold between the members of a related group,and such sale may result in gain to the seller.The buyer will record the asset at a price inclusive of gainand when there is a depriciable asset , the buyer will base future depriciation charges on the price paid. While these recordings are suitable for separate entities , they must not be there in consolidated statements.

This sale is viewed as an internal transfer of assets.There is no reason of recognizing a gain at the time of internal transfer.Recognition of a gain on sale of depriciable asset does not have to wait until the resale occurs.Alternatively, the intercompany gain is amotized over the depriciable life of asset.Since the asset is overstated by the amt of inter company gain , subsequent depriciation is overstaed as well.

The consolidation process will reduce the depriciation for coming years so that the dep. charge in the consolidated statement shows the original cost of the asset and the gain is deferred in the year of sale, which is realized later through the combined net income as a result of reduced dep. in subsequent years.

ekkarill92 answered 1 year ago

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