6-1

Baker / Lembke / King

Intercorporate
Transfers of
Services and
Noncurrent
6
Electronic Presentation by
Douglas Cloud

Assets
Pepperdine University

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Intercorporate Transfers
• A parent company and its subsidiaries often
engage in a variety of transactions among
themselves.
• For example, manufacturing companies
often have subsidiaries that develop raw
materials or produce components to be
included in the products of affiliated
companies.
• These transactions between related
companies are referred to as intercorporate
transfers.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Intercorporate Transfers
• The central idea of consolidated financial
statements is that they report on the activities
of the consolidating affiliates as if the
separate affiliates actually constitute a single
company.
• Because single companies are not permitted
to reflect internal transactions in their
financial statements, consolidated entities also
must exclude from their financial statements
the effects of transactions that are contained
totally within the consolidated entity.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Intercorporate Transfers
• Building on the basic consolidation
procedures presented in earlier chapters,
this chapter and the next two deal with the
effects of intercorporate transfers.
• This chapter deals with intercorporate
services (e.g., consulting) and sales of fixed
assets, while intercorporate sales of
inventory and intercorporate debt transfers
are discussed in Chapters 7 and 8,
respectively.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Intercorporate Transfers
• All aspects of intercorporate transfers must
be eliminated in preparing consolidated
financial statements so that the statements
appear as if they were those of a single
company.
• PSAK 4 mentions open account balances,
security holdings, sales and purchases, and
interest and dividends as examples of the
intercompany balances and transactions that
must be eliminated.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Intercorporate Transfers
• The focus in consolidation is on the single-
entity concept rather than on the percentage
of ownership.
• Once the conditions for consolidation are
met, a company becomes part of a single
economic entity and all transactions with
related companies become internal transfers
that must be eliminated fully, regardless of
the level of ownership held.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-7
Transactions of Affiliated Companies

Parent
Company

Subsidiary Subsidiary
A B

Consolidated Entity
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Unrealized Profits and Losses
• Profit of loss from selling an item to a
related party normally is considered realized
at the time of the sale from the selling
company’s perspective, but the profit is not
considered realized for consolidation
purposes until confirmed, usually through
resale to an unrelated party.
• This unconfirmed profit from an
intercorporate transfer is referred to as
unrealized intercompany profit.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Unrealized Profits and Losses
• From a consolidated viewpoint, the sale of
an asset wholly within the consolidated
entity involves only a change in the location
of the asset and does not represent the
culmination of the earning process.
• To culminate the earning process with
respect to the consolidated entity, a sale
must be made to a party external to the
consolidated party.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Unrealized Profits and Losses
• The key to deciding when to report a
transaction in the consolidated financial
statements is to visualize the consolidated
entity and determine whether a particular
transaction occurs totally with the
consolidated entity, in which case its effects
must6-10be excluded from the consolidated
statements, or involves outsiders and thus
constitutes a transaction of the consolidated
entity.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Asset Transfers Involving Land
6-11

• When intercorporate transfers of noncurrent

assets occur, adjustments often are needed
in the preparation of consolidated financial
statements for as long as the assets are
held by the acquiring company.
• The simplest example of an intercorporate
asset transfer is the intercorporate sale of
land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-12
Intercorporate Sales
Consolidated Entity
T1–Purchase of land from
outsider for Rp10,000,000.

PT Induk PT Anak
T1
Purchase of
Rp10,000,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-13
Intercorporate Sales
Consolidated Entity
T2–Land sale from PT Induk to PT Anak
for Rp15,000,000.

PT Induk PT Anak
T1 T2
Purchase of Sale/Purchase of
Rp10,000,000 Rp15,000,000

Gain of
Rp5,000,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-14
Intercorporate Sales
Consolidated Entity
T3–Land sale from PT Anak to outsider
for Rp25,000,000.

PT Induk PT Anak
T1 T2 T3
Purchase of Sale/Purchase of Sale of
Rp10,000,000 Rp15,000,000 Rp25,000,000

Gain of Gain of
Rp5,000,000 Rp10,000,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-15
Intercorporate Sales--Case A
If allConsolidated
three transactions are completed
Entity
in the same accounting period, the
parent records a gain of Rp5,000,000, the
subsidiary Rp10,000,000, and the consolidated
entity reports a gain of Rp15,000,000.

PT Induk PT Anak

Purchase of Sale/Purchase of Sale of

Rp10,000,000 Rp15,000,000 Rp25,000,000

Gain of Gain of
Rp5,000,000 Rp10,000,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-16
Intercorporate Sales--Case A

All three transactions are completed in the same

accounting period.

PT Induk Rp 5,000,000 (Rp15,000,000- Rp10,000,000)

PT Anak 10,000,000 (Rp25,000,000- Rp15,000,000)
Consolidated Entity 15,000,000 (Rp25,000 ,000- Rp10,000,000)

The gain reported by each of the entities is

considered to be realized because the land is resold
Gain
to an unrelated party during the same period.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-17
Intercorporate Sales--Case B

Only transaction T1 is completed during the current

period.

PT Induk Rp -0-
PT Anak -0-
Consolidated Entity -0-

No sale has been made by either of the affiliated

companies, and no gains are reported or realized.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-18
Intercorporate Sales--Case C

Only transactions T1 and T2 are completed during

the current period.

PT Induk Rp5,000,000 (Rp15,000,000 - Rp10,000,000)

PT Anak

-0-
Consolidated Entity
The gain reported by PTGain
Induk is considered
unrealized from a consolidated point of view and is
-0-
not reported in the consolidated income statement.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-19
Intercorporate Sales--Case D

Only transaction T3 is completed during the current

period.

PT Induk Rp -0-
PT Anak 10,000,000 (Rp25,000,000 - Rp15,000,000)
Consolidated Entity 15,000,000 (Rp25,000,000– Rp10,000,000)

PT Anak recognizes a gain equal to the difference

between its selling price of Rp25,000 and cost of
Rp15,000, while the consolidated
Gain entity reports a
gain equal to the difference between the selling
price and the parent’s original cost.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-20
Overview of the Profit Elimination Process

January 1, PT Induk PT Anak

20X1

Purchased
land for
PT Induk (Entry 1)
Rp20,000,000 Jan. 1 Land 20,000,000
Cash 20,000,000
Record purchase of land.

Consolidated Entity
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-21
Overview of the Profit Elimination Process
PT Induk (Entry 2)
July 1 Cash 35,000,000
Land 20,000,000
Gain on Sale of Land 15,000,000
Record sale of land to PT Anak.
PT Induk PT Anak
July 1, 20X1

Intercorporate
transfer of land
Rp35,000,000

Consolidated Entity
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-22
Overview of the Profit Elimination Process
PT Anak (Entry 3)
July 1 Land 35,000,000
Cash 35,000,000
Record purchase of land from PT Induk.

PT Induk PT Anak
July 1, 20X1

Intercorporate
transfer of land
Rp35,000,000

Consolidated Entity
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-23
Overview of the Profit Elimination Process

Because the land has not been sold to a party

outside the consolidated entity, the land must be
reported at its original cost (Rp20,000,000) and
the gain (Rp15,000,000) must be eliminated. The
following entry is required in the consolidated
workpaper prepared at the end of 20X1.
E(4) Gain on Sale of Land 15,000,000
Land 15,000,000
Eliminate unrealized gain on the
sale of land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-24
Assignment of Unrealized Profit Elimination

When a sale is from a parent to a subsidiary,

referred to as a downstream sale, any gain or
loss on the transfer accrues to the stockholders
of the parent company.

When the sale is from a subsidiary to its parent,

an upstream sale, any gain or loss accrues to
the stockholders of the subsidiary, which is
apportioned between the parent company and
the noncontrolling shareholders.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-25
Downstream Sale
1. PT Induk purchases 80 percent of the stock of PT
Anak on December 31, 20X1, at the stock’s book
value of Rp240,000,000.
2. On July 1, 20X1, PT Induk sells land to PT Anak for
Rp35,000,000. The land originally cost PT Induk
Rp20,000,000.
3. During 20X1, PT Anak reports net income of
Rp50,000,000 and declares dividends of
Rp30,000,000.
4. PT Induk accounts for its investment in PT Anak
using the basic equity method.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-26
Downstream Sale

Basic Equity MethodRp50,000,000

x .80
(5) Cash 24,000,000
Investment in PT Anak Stock 24,000,000
Record dividend from PT Anak.
Rp30,000,000
x .80

(6) Investment in PT Anak Stock 40,000,000

Income from Subsidiary 40,000,000
Record equity-method income

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-27

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 40,000

Dividends
Declared (60,000 ) (30,000)

Investment in
PT Anak 256,000

An entry is needed to eliminate the changes in PT

Induk’s investment account for the year, the income
from PT Anak recognized by PT Induk, and PT
Induk’s share of PT Anak’ dividends.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-28

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 40,000 (7) 40,000

Dividends
Declared (60,000 ) (30,000) (7) 24,000

Investment in
PT Anak 256,000 (7) 16,000

An entry is needed to eliminate the changes in PT

Induk’s investment account for the year, the income
from PT Anak recognized by PT Induk, and PT
Induk’s share of PT Anak’ dividends.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Consolidation Workpaper--20X1 (in ‘000) 6-29

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income to
Noncontrolling
Interest

Dividends
Declared (60,000) (30,000) (7) 24,000

Noncontrolling
Interest

An entry is necessary to assign a share of PT Anak’

income to the noncontrolling stockholders and eliminate
their share of PT Anak’ dividends.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Consolidation Workpaper--20X1 (in ‘000) 6-30

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income to
Noncontrolling
Interest (8) 10,000 (10,000)

Dividends
Declared (60,000) (30,000) (7) 24,000
(8) 6,000 (60,000)
Noncontrolling
Interest (8) 4,000

An entry is necessary to assign a share of PT Anak’

income to the noncontrolling stockholders and eliminate
their share of PT Anak’ dividends.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-31

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings, Jan. 1 300,000 100,000

Investment in
PT Anak 256,000 (7) 16,000

Common Stock--
PT Anak 500,000 200,000

Noncontrolling
Interest (8) 4,000

An entry is required to eliminate the

beginning investment balance.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-32

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings, Jan. 1 300,000 100,000 (9) 100,000 300,000

Investment in
PT Anak 256,000 (7) 16,000
(9) 240,000
Common Stock--
PT Anak 500,000 200,000 (9) 200,000 500,000

Noncontrolling
Interest (8) 4,000
(9) 60,000 64,000
An entry is required to eliminate the
beginning investment balance.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-33

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Land 15,000 (10) 15,000 0

Land 155.000 75.000 (10) 15,000 215.000

An entry is needed to eliminate the changes in PT

Induk’s investment account for the year, the income
from PT Anak recognized by PT Induk, and PT
Induk’s share of PT Anak’ dividends.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-34
Downstream Sales
On Subsequent year, not yet sold:
E(17) Retained Earnings 15,000,000
Land 15,000,000
Eliminate unrealized gain on the sale of land

If Sold on Subsequent year:

E(19) Retained Earnings 15,000,000
Gain on Sale of Land 15,000,000
Eliminate unrealized gain on the sale of land

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-35
Upstream Sales - Basic Equity Method Entries—20X1

Rp30,000,000
x .80
(11) Cash 24,000,000
Investment in PT Anak 24,000,000
Record dividend from PT Anak
Rp65,000,000
x .80
(12) Investment in PT Anak Stock 52,000,000
Income from Subsidiary 52,000,000
Record equity-method income

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-36

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 52,000

Dividends
Declared (60,000) (30,000)

Investments in
PT Anak
Stock 268,000

An entry is needed to eliminate the

income from the subsidiary.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-37

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 52,000 (13) 52,000

Dividends
Declared (60,000) (30,000) (13) 24,000

Investments in
PT Anak
Stock 268,000 (13) 28,000

An entry is needed to eliminate the

income from the subsidiary.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-38

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income to
Noncontrolling
Interest

Dividends
Declared (60,000) (30,000) (13) 24,000

Noncontrolling
Interest

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-39

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income to
Noncontrolling
Interest (14) 10,000 (10,000)

Dividends
Declared (60,000) (30,000) (13) 24,000
(14) 6,000

Noncontrolling
Interest (14) 4,000

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-40

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 300,000 100,000

Investment in
PT Anak
Stock 268,000 (13) 28,000

Common Stock 500,000 200,000

Noncontrolling
Interest (14) 4,000

An entry is needed to eliminate the

McGraw-Hill/ Irwin
beginning investment balance.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-41

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 300,000 100,000 (15)100,000 300,000

Investment in
PT Anak
Stock 268,000 (13) 28,000
(15) 240,000
Common Stock 500,000 200,000 (15)200,000

Noncontrolling
Interest (14) 4,000
(15) 60,000 64,000

An entry is needed to eliminate the

McGraw-Hill/ Irwin
beginning investment balance.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-42

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Land 15,000

Land 155,000 75,000

An entry is needed to eliminate the unrealized gain

on the intercompany sale of the land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-43

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Land 15,000 (16) 15,000

Land 155,000 75,000 (16) 15,000 215,000

An entry is needed to eliminate the unrealized gain

on the intercompany sale of the land.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-44
Consolidated Net Income--20X1

PT Induk’s separate income Rp155,000,000

Less: Unrealized intercompany profit on downstream
land sale -15,000,000
PT Induk’s separate realized income Rp140,000,000
PT Induk’s share of PT Anak’s income:
PT Anak’ net income Rp50,000,000
PT Induk’s proportionate share x .80 40,000,000
Consolidated net income, 20X1 Rp180,000,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-45
Upstream Sales
On year 1:
E(16) Gain on Sale of Land 15,000,000
Land 15,000,000
Eliminate unrealized gain on the sale of land.
On Subsequent year, not yet sold:
E(18) Retained Earnings 12,000,000
Non Controlling Interest 3,000,000
Land 15,000,000
Eliminate unrealized gain on the sale of land

How about if sold in subsequent year?

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-46
Transfers Involving Depreciable Assets
• Unrealized intercompany profits on a depreciable or
amortizable asset are viewed as being realized
gradually over the remaining economic life of the asset
as it is used by the purchasing affiliate in generating
revenue from unaffiliated parties.
• In effect, a portion of the unrealized gain or loss is
realized each period as benefits are derived from the
asset and its service potential expires.
• The amount of depreciation recognized on a company’s
books each period on an asset purchased from an
affiliate is based on the intercorporate transfer price.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-47
Transfers Involving Depreciable Assets
• Yet, from a consolidated viewpoint, depreciation must
be based on the cost of the asset to the consolidated
entity, which is the cost of the asset to the related
company that originally purchased it from an outsider.
• Eliminating entries are needed in the consolidation
workpaper to restate the asset, associated accumulated
depreciation, and depreciation expense to the amounts
that would appear in the financial statements if there
had been no intercompany transfer.
• Because the intercompany sale takes place totally
within the consolidated entity, the consolidated
financial statements must appear as if the intercompany
transfer had never occurred.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 Downstream Sale – Depreciable Assets 6-48

Consolidated Entity

December 31, PT Induk PT Anak

20W8

Purchase
equipment for
Rp9,000,000 Equipment Estimated Useful Life: 10 years
Dec. 31 Equipment 9,000,000
Cash 9,000,000
Record purchase of equipment.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-49
Downstream Sale
PT Anak (Entry 20)
Dec. 31 Equipment 7,000,000
Cash 7,000,000
Record purchase of equipment.

PT Induk December 31, PT Anak

20X1

Intercorporate
PT Induk (Entry
transfer of 21)
Dec. 31 Depreciation Expense
equipment 900,000
Accumulated Depreciation
Rp7,000,000 900,000
Record 20X1 depreciation
expense on equipment sold.
Consolidated Entity
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-50
Downstream Sale

PT Induk records the sale of the equipment at the end of 20X1

and recognizes the gain on the sale:

PT Induk (Entry 22)

Dec. 31 Cash 7,000,000
Accumulated Depreciation 2,700,000
Equipment 9,000,000
Gain on Sale of Equipment 700,000
Record sale of equipment.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-51
Downstream Sale
PT Induk records the normal basic equity-method entries to
recognize it share of PT Anak’ income and dividends for 20X1:

PT Induk (Entry 24)

Dec. 31 Investment in PT Anak Stock 40,000,000
Income from Subsidiary 40,000,000
Record equity-method income.Rp30,000,000
x .80
PT Induk (Entry 23) Rp50,000,000
Dec. 31 Cash 24,000,000 x .80
Invest. in PT Anak Stock 24,000,000
Record dividends from PT Anak.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-52

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income from
Subsidiary 40,000

Dividends
Declared (60,000) (30,000)

Investment in
PT Anak 256,000

An entry is needed to eliminate the income and dividends

from PT Anak recognized by PT Induk and the change in the
investment account for the year.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-53

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income from
Subsidiary 40,000 (25) 40,000

Dividends
Declared (60,000) (30,000) (25) 24,000

Investment in
PT Anak 256,000 (25) 16,000

An entry is needed to eliminate the income and dividends

from PT Anak recognized by PT Induk and the change in the
investment account for the year.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-54

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income to Non-
controlling
Interest

Dividends
Declared (60,000) (30,000) (25) 24,000

Noncontrolling
Interest

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-55

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income to Non-
controlling
Interest (26) 10,000 (10,000)

Dividends
Declared (60,000) (30,000) (25) 24,000
(26) 6,000 (60,000)
Noncontrolling
Interest (26) 4,000

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-56

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 300,000 100,000

Investment in
PT Anak
Stock 256,000 (25) 16,000

Common Stock 500,000 200,000

Noncontrolling
Interest (26) 4,000

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
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Consolidation Workpaper--20X1 (in ‘000) 6-57

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 300,000 100,000 (27) 100,000 300,000

Investment in
PT Anak
Stock 256,000 (25) 16,000
(27) 240,000
Common Stock 500,000 200,000 (27) 200,000 500,000

Noncontrolling
Interest (26) 4,000
(27) 60,000 64,000

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-58

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Equipment 700

Buildings and
Equipment 791,000 607,000

Accumulated
Depreciation 447,300 320,000

The unrealized gain on downstream sale

of equipment needs eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-59

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Equipment 700 (28) 700

Buildings and
Equipment 791,000 607,000 (28) 2,000 1,400,000

Accumulated
Depreciation 447,300 320,000 (28) 2,700 770,000

The unrealized gain on downstream sale

of equipment needs eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-60
In 20X2
• The equipment sold has 7 years
remaining life.  Depreciation per year
Rp7,000,000 / 7 years = Rp1,000,000.
• PT Anak Food’s separate income:
Rp75,000,000 – Rp1,000,000
(depreciation) = Rp74,000,000
• Dividends paid Rp 40,000,000
• Journal recorded by PT Induk?
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-61
Upstream Sales - Basic Equity Method Entries—20X1

Rp74,000,000
x .80
(12) Investment in PT Anak Stock 59,200,000
Income from Subsidiary 59,200,000
Rp40,000,000
Record equity-method income x .80
(11) Cash 32,000,000
Investment in PT Anak Stock 32,000,000
Record dividend from PT Anak.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-62

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 59,200

Dividends
Declared (60,000) (40,000)

Investments in
PT Anak
Stock 283,200

An entry is needed to eliminate income

form the subsidiary.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-63

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 59,200 (32) 59,200

Dividends
Declared (60,000) (40,000) (32) 32,000

Investments in
PT Anak
Stock 283,200 (32) 27,200

An entry is needed to eliminate income

form the subsidiary.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-64

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income to
Noncontrolling
Interest

Dividends
Declared (60,000) (40,000) (32) 32,000

Noncontrolling
Interest

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-65

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income to
Noncontrolling
Interest (33) 14,800 (14,800)

Dividends
Declared (60,000) (40,000) (32) 32,000
(33) 8,000 (60,000)

Noncontrolling
Interest (33) 6,800

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-66

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,700 120,000

Investment in
PT Anak
Stock 283,200 (32) 27,200

Common Stock 500,000 200,000

Noncontrolling
Interest (33) 6,800

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-67

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,700 120,000 (34)120,000

Investment in
PT Anak
Stock 283,200 (32) 27,200
(34) 256,000
Common Stock 500,000 200,000 (34)200,000 500,000

Noncontrolling
Interest (33) 6,800
(34) 64,000 70,800

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-68

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,700 120,000 (34)120,000

Buildings and
Equipment 791,000 607,000

Accumulated
Depreciation 496,400 341,000

The unrealized gain on downstream sale

of equipment needs eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-69

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,700 120,000 (34)120,000
(35) 700 420,000

Buildings and
Equipment 791,000 607,000 (35) 2,000

Accumulated
Depreciation 496,400 341,000 (35) 2,700

The unrealized gain on downstream sale

of equipment needs eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-70

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Depreciation and
Amortization 49,100 21,000

Accumulated
Depreciation 496,400 341,000 (35) 2,700

An entry is required to adjust depreciation

for realization of the intercompany gain.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-71

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Depreciation and
Amortization 49,100 21,000 (36) 100 70,000

Accumulated
Depreciation 496,400 341,000 (36) 100 (35) 2,700 840,000

An entry is required to adjust depreciation

for realization of the intercompany gain.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-72
Notes

Journal 35 and 36 can be united into:

Building and Equipment 2,000,000
Retained Earnings 700,000
Depreciation Expense 100,000
Accumulated Depreciation 2,600,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-73
Consolidated Net Income--20X2

PT Induk’s separate income Rp160,900,000

Partial realization of intercompany gain
on downstream sale of equipment 100,000
PT Induk’s separate realized income Rp161,000,000
PT Induk’s share of PT Anak’s income:
PT Anak’ net income Rp74,000,000
PT Induk’s proportionate share x .80 59,200,000
Consolidated net income, 20X2 Rp220,200,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Subsequent years, if not sold
6-74

Building and Equipment 2,000,000

Retained Earnings 600,000
Accumulated Depreciation 2,600,000

Accumulated Depreciation 100,000

Depreciation Expense 100,000

OR:
Building and Equipment 2,000,000
Retained Earnings 600,000
Depreciation Expense 100,000
Accumulated Depreciation 2,500,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-75
Upstream Sale
PT Anak sold Equipment for Rp7,000,000 (which previously bought at
Rp9,000,000 and had been depreciated for 2 years). PT Anak records
the sale of the equipment at the end of 20X1 and recognizes the gain on
the sale:
PT Anak
Dec. 31
Depreciation Expense 900,000
Accumulated Depreciation 900 ,000
Record sale of equipment.
Dec. 31 Cash PT Anak 7,000,000
Accumulated Depreciation 2,700 ,000
Equipment 9,000,000
Gain on Sale of Equipment 700 ,000
Record sale of equipment.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-76
Uostream Sale

PT Induk records the purchase of the equipment at the end of

20X1 as follows:

PT Induk (Entry 41)

Dec. 31
Equipment 7,000,000
Cash 7,000,000

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-77
Upstream Sale
PT Induk records the normal basic equity-method entries to
recognize it share of PT Anak’ income and dividends for 20X1:

PT Induk (Entry 43)

Dec. 31 Investment in PT Anak Stock 40,560,000
Income from Subsidiary 40,560 ,000
Record equity-method income. Rp30,000,000
x .80
PT Induk (Entry 42) Rp50,700
Dec. 31 Cash 24,000,000 x .80
Invest. in PT Anak Stock 24,000,000
Record dividends from PT Anak.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-78

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income from
Subsidiary 40,560

Dividends
Declared (60,000) (30,000)

Investment in
PT Anak 256,560

An entry is needed to eliminate the income and dividends

from PT Anak recognized by PT Induk and the change in the
investment account for the year.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-79

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income from
Subsidiary 40,560 (44) 40,560

Dividends
Declared (60,000) (30,000) (44) 24,000

Investment in
PT Anak 256,560 (44) 16,560

An entry is needed to eliminate the income and dividends

from PT Anak recognized by PT Induk and the change in the
investment account for the year.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-80

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income to Non-
controlling
Interest

Dividends
Declared (60,000) (30,000) (44) 24,000

Noncontrolling
Interest

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-81

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Income to Non-
controlling
Interest (45) 10,000 (10,000)

Dividends
Declared (60,000) (30,000) (44) 24,000
(45) 6,000 (60,000)
Noncontrolling
Interest (45) 4,000

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-82

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 300,000 100,000

Investment in
PT Anak
Stock 256,000 (44) 16,560

Common Stock 500,000 200,000

Noncontrolling
Interest (45) 4,000

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-83

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 300,000 100,000 (46) 100,000 300,000

Investment in
PT Anak
Stock 256,560 (44) 16,560
(46) 240,000
Common Stock 500,000 200,000 (46) 200,000 500,000

Noncontrolling
Interest (45) 4,000
(46) 60,000 64,000

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-84

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Equipment 700

Buildings and
Equipment 807,000 591,000

Accumulated
Depreciation 450,000 317,300

The unrealized gain on upstream sale

of equipment needs eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X1 (in ‘000) 6-85

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated

Gain on Sale of
Equipment 700 (47) 700

Buildings and
Equipment 807,000 591,000 (47) 2,000 1,400,000

Accumulated
Depreciation 450,000 317,300 (47) 2,700 770,000

The unrealized gain on upstream sale

of equipment needs eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-86

On 20X2
• The equipment sold has 7 years remaining
life.  Depreciation per year Rp7,000,000 /
7 years = Rp1,000,000.
• PT Anak Food’s separate income:
Rp75,900,000
• Dividends paid Rp 40,000,000
• Journal recorded by PT Induk?

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-87
Upstream Sales - Basic Equity Method Entries—20X1

Rp75,900,000
x .80
Investment in PT Anak Stock 60,720,000
Income from Subsidiary 60,720,000
Rp40,000,000
Record equity-method income x .80
Cash 32,000,000
Investment in PT Anak Stock 32,000,000
Record dividend from PT Anak.

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-88

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 60,720

Dividends
Declared (60,000) (40,000)

Investments in
PT Anak
Stock 285,280

An entry is needed to eliminate income

form the subsidiary.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-89

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income from
Subsidiary 60,720 (48) 60,720

Dividends
Declared (60,000) (40,000) (48) 32,000

Investments in
PT Anak
Stock 285,280 (48) 28,720

An entry is needed to eliminate income

form the subsidiary.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-90

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income to
Noncontrolling
Interest

Dividends
Declared (60,000) (40,000) (48) 32,000

Noncontrolling
Interest

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-91

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Income to
Noncontrolling
Interest (49) 15,200 (15,200)

Dividends
Declared (60,000) (40,000) (48) 32,000
(49) 8,000 (60,000)

Noncontrolling
Interest (49) 7,200

An entry is required to assign income

to the noncontrolling interest.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-92

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,560 120,700

Investment in
PT Anak
Stock 285,280 (48) 28,720

Common Stock 500,000 200,000

Noncontrolling
Interest (49) 7,200

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-93

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,560 120,700 (50)120,700

Investment in
PT Anak
Stock 285,280 (48) 28,720
(50) 256,560
Common Stock 500,000 200,000 (50)200,000 500,000

Noncontrolling
Interest (49) 7,200
(50) 64,140 71,340

The stockholders’ equity accounts of PT Anak and the investment

account as of the beginning of the year need eliminating.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-94

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,560 120,700 (50)120,700

Buildings and
Equipment 807,000 591,000

Accumulated
Depreciation 501,000 336,400

Non Controlling 7,200

Interest 64,140

The unrealized gain on downstream sale

McGraw-Hill/ Irwin of equipment needs eliminating.
Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-95

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Retained
Earnings (1/1) 420,560 120,700 (50)120,700
(51) 560 420,000

Buildings and
Equipment 807,000 591,000 (51) 2,000 1,400,000

Accumulated
Depreciation 501,000 336,400 (51) 2,700 840,000

Non Controlling (51) 140 7,200

Interest 64,140 71,200

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-96

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Depreciation and
Amortization 49,100 21,000

Accumulated
Depreciation 501,000 336,400 (51) 2,700

An entry is required to adjust depreciation

for realization of the intercompany gain.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
Consolidation Workpaper--20X2 (in ‘000) 6-97

PT Induk PT Anak Eliminations

Item Debits Credits Consolidated
Depreciation and
Amortization 49,100 21,000 (52) 100 70,000

Accumulated
Depreciation 501,000 336,400 (52) 100 (51) 2,700 840,000

An entry is required to adjust depreciation

for realization of the intercompany gain.
McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.
 6-98
Chapter Six

THE END

McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved.