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advanced accounting 16 intercompany transfers depreciable asset this is Ken boy the owner of singles test preparation here's our Facebook page or email and our phone number this information was taken from the advanced accounting facts chapter 16 McGraw Hill and you'll see a related video on intercompany transfers and pricing in management accounting 16 depreciable assets let's first of all talk about why do we have depreciation again the purpose is going way way back to basic accounting is to match the expense of using the asset with the revenue that it generates so if you've got a plumbing company you own a truck that you're going to depreciate over five years you're going to match the five year depreciation with the revenue that you've generated by owning that truck so the result is that the consolidated financials are going to eventually include the cost of the asset which depreciation that will be in the consolidated financial but the sale from one entity to another from subsidiary to parent or the reverse will not be the other thing to remember is unrealized intercompany profits which is defined as the unconfirmed profit from intercompany transfer which I just explained and you'll see more of that when you look at a judgment accounting 16 where we talk about transfer pricing I'm going to flip over to excel and I want to do an example of an intercompany transfer and talk about a depreciable asset so we think about vehicles equipment building etc so let's assume that on 12/31 Levi's jeans sold equipment to Hollywood jeans which is a subsidiary for $7,000 Levi's cost is $9,000 for a piece of equipment that they purchased three years earlier it's got a 10-year life they use straight-line depreciation Levi's does and there's no residual value we'll say that the book value at the time and Levi's sells equipment Hollywood $6,300 so on Levi's verbs they're going to get sale proceeds of 7,000 they're going to remove book value of 6300 so they're going to have a gain on sale of 700 dollars so we're going to have two sets of books to concern ourselves with the journal entries first of all Hollywood the subsidiary on the day of the transaction is going to record an asset equipment by debiting they're going to increase the account $7,000 they're going to reduce cash $7000 to record the purchase of the equipment on Levi's books in blue they're going to record a year's worth of depreciation on the equipment that they sold so if we look at a debit for depreciation expense to credit the contra asset account accumulated depreciation if I click on this cell you will see that it's f7 the cost of the asset to Levi divided by the ten-year depreciation to get $900 then finally on Levi's books we're going to have the transaction record the gain on sale of equipment I've got a typo there which is a sale equipment we get cash in the door of 7,000 we have three years worth of accumulated depreciation so this number is the $900 times three years because again Levi's is own the asset for three years when they make the sale so we're taking all the accumulate all the accumulated depreciation off the books here three years worth of $900 we're removing the equipment by crediting and we remove that equipment at cost and the difference between debits here and credits here or if I click on the cell is the $700 gain which is a credit gains or credit so then the last thing to talk about is well when we consolidate Levi's and a Hollywood what's going to be the elimination entry well essentially we're going to undo what happened in these entries up on top we're going to put building an equipment back on the books to the tune of two $2,000 which is really the difference between the 9000 that Levi's had on their books and 7000 that Holly would put on their books so 9,000 my- 7000 gives us a debit of 2,000 to put that back the way it was we're going to debit to remove the gain on sale that we credited here and we're going to credit in the elimination effort we're going to credit accumulated appreciation for the twenty seven hundred dollars that we debited here so essentially the building and equipment debit reverses out that ink that reduction equipment when we went to 9,000 down to 7,000 the gain on sale gets debited sauce at the credit the accumulated appreciation gets credited to get rid of the debit and again the note on the entry is to eliminate the unrealized gain on the downstream sale so it went from parent Levi downstream to subsidiaries Hollywood so in note one here I say the 2,000 represents the difference between the cash received the 9,000 and the equipment sold 7,000 one last thing well what if we had sold this asset to a third party somebody who was outside the company that is somebody buys it who is not the parent or the subsidiary what would happen if the equipment was subsequently so does something sold to someone outside the company that game would be recognized over the remaining life of the asset so if we went forward each year of the assets live we would recognize a portion of the game flipping back the PowerPoint to finish up here remember not only on a transfer on land but in any asset we can have fair values that differ from Book value but really write any asset here for the purposes of this presentation and also one more reminder on an upstream versus downstream sale downstream like we just saw in the sell document here his parent to subsidiary Hollywood upstream sales the other direction subsidiary Hollywood to current Levi's and we've seen through the videos that the elimination injuries can differ slightly so keep that in mind that's the end of advanced accounting 16 you'll find our long courses that I've done and GoToMeeting if you contact me on management accounting finance and other courses our youtube channel Kemboi def CLL one word to register for one-on-one tutoring or in small group live chat sessions in both cases we use goto meeting.com you can go to the website which is listed here which also has if you click on video listing a complete list of all of our videos by topic here's our email on our phone number thanks very much and we'll see you next time